Investors can exercise the embedded call option at any time over the maturity of the 10-year bond. This provides investors with a reduced risk profile compared with a typical fund of hedge funds product. The bond is also redeemable after 10 years for shares in the underlying portfolios.
The hedge fund pool underlying the exchangeable bond also differs from a normal fund of hedge funds due to the high level of reporting required of the individual hedge funds. Unlike a traditional fund of funds, which invests a portion of its money in individual hedge funds without monitoring the individual fund positions, the managed account requires daily reporting of positions by the individual hedge fund managers. This is then aggregated and the figure is reported to the managed account investors. Investors are able to look at the daily NAV of the pool, the aggregated value-at-risk figure, as well as the daily portfolio exposure.
"The product stands out uniquely in the hedge fund industry due to its very high level of transparency and daily liquidity at NAV," said Lars Jaeger, partner at Partners Group, who was involved in structuring the bond.
Premier will invest in a diversified basket of hedge fund strategies, including convertible arbitrage, long/short equity and merger arbitrage. Partners, which hopes to raise €500 million from the bond, said the product will aim to generate a total annual return of around 8% to 12% in the underlying with a volatility of 5% to 7%.
Partners and Merrill Lynch will issue the bond in several tranches, the first of which will be aimed specifically at institutional investors.