The IPO market isn’t always all it’s cracked up to be, which is why it can make sense to short-sell newly public companies, according to Josef Schuster, manager of the Direxion Long/Short Global IPO Fund Ticker:(DXIIX).
“A lot of companies make it to the market, but out of 100 IPOs, typically, 80 will underperform, and 20 will do quite well,” said Mr. Schuster, who is managing the fund on a subadvisory basis as founder of Ipox Capital Management LLC.
Mr. Schuster, whose firm specializes in index construction in the international initial public offering space, pointed out that tracking the overall market of new public companies can be deceiving. “There’s a big skew in the IPO data, because a few companies will drive the performance of many,” he said.
The fund was launched March 4 by Direxion Funds, which has $6.5 billion under management.
“IPOs are an area that retail investors have little access to,” said Paul Brigandi, Direxion Funds’ senior vice president.
The fund’s strategy is designed to be less correlated to the overall equity markets. Mr. Schuster hopes to achieve that non-correlated performance by concentrating on three stages of an IPO.
During the first stage, shortly after a company goes public, performance is almost a given, he said. “IPOs are typically underpriced as an incentive to get institutional investors to participate,” he said.
Mr. Schuster will tap into the first stage of IPOs by buying shares at the offering or shortly thereafter.
During the second stage — the 12 months after a company goes public — the companies tend to outperform due to strong support from underwriters, lack of analyst coverage, short-selling constraints and index inclusion, he said.
During the third stage, between the second and fourth years after a company goes public, “very few companies do very well,” Mr. Schuster said.
The fund is starting out with 74 long positions and 104 short positions, and a net-long exposure of about 15%.
Globally, there have already been 180 IPOs this year, but Mr. Schuster is selectively looking for companies that are “under the radar screen.”
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