First Opportunity Fund: A Way To Buy Hedge Funds At A Sizable Discount

| About: Boulder Growth (BIF)

Since hedge funds are almost totally unregulated, the government purposely makes it hard to invest in them. In the US, you have to be an “accredited investor” with a net worth of at least $1 million not including your house, or an annual income over $200,000 a year for the last two years ($300,000 if married).

Even of you are qualified, hedge fund management fees are quite steep. Many hedge funds charge a 2% management fee and then add on a 20% incentive fee paid for performance above an index. The total management fee can easily reach 5% in a bull market year.

If you are an accredited investor, there are ways to buy some hedge funds at a discount in the secondary market. One firm that allows this is Hedgebay Trading, but the process can be quite complex with a lot of paperwork required.

But there is a way for any investor to participate in hedge funds at a discounted price. The First Opportunity Fund, Inc. (FOFI.PK) is a closed-end fund that trades in the OTC market. FOFI has highly concentrated positions in hedge funds that total about 51% of the fund assets and are managed by Wellington.

These were the hedge fund positions held by the fund as of June 30, with the approximate amount invested in each:

1) Wolf Creek Partners LP $48 million

2) Bay Pond Partners LP $43 million

3) J. Caird Partners LP $20 million

4) North Rivers Partners LP $16 million

5) Iguazu Partners LP $ 5 million

Most hedge funds have restrictions and lockup periods that affect how/when you can sell your shares. One big advantage of FOFI is that the shares are traded every day and can be sold at any time.

Aside from the hedge funds, the remainder of FOFI is invested in a few blue chips along with a heavy concentration in small savings and loan stocks.

Steady Insider Buying

The fund is managed by Boulder Investment Advisors which is controlled by Stewart Horejsi. Horejsi and his family own large positions in FOFI, and there has been steady insider buying of the fund this year. The Horejsi family were early investors in Berkshire Hathaway. They have since become investment advisers and run several closed-end funds including BIF, BTF and DNY. Here are some of the recent FOFI purchases by the Mildred B. Horejsi Trust in October and November:

10/03/2011 5,000 shares @ 6.00

10/04/2011 5,000 shares @ 5.78

10/11/2011 7,000 shares @ 6.25

10/12/2011 500 shares @ 6.29

10/24/2011 6,106 shares @ 6.32

11/01/2011 274 shares @ 6.19

11/21/2011 5,287 shares @ 6.13

First Opportunity Fund

- Expense Ratio: 1.24%

- Total Net Assets: $245 million

- Current Discount to NAV= -27.80%

- 6 Month Average discount= -24.41%

- 6 Month Z-Statistic= -1.21 (more than one standard deviation below the mean)

- AnnualPortfolio Turnover: 97%

- Leverage: None (but the fund may use warrants or credit default swaps)

- Average Daily Trading Volume= 29,000 shares

- Average Daily Trading $ Volume= $200,000

FOFI is an interesting way to participate in hedge funds for retail investors. It can be used by investors who are looking for exposure to the financial services sector. FOFI traditionally trades at a large discount to net asset value, and at the current time this discount is even wider than usual. FOFI is fairly illiquid and trades with a wide bid-asked spread. It is not suitable for short term swing trading, but may be a good choice as a longer term investment.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.