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September 30, 1999

Hambrecht's IPO Fund

By Avital Louria Hahn

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  • Hambrecht's IPO Fund

For the past two-and-a-half years, the Renaissance Plus IPO Aftermarket Fund (Nasdaq:IPOSX) has been the only U.S. fund to invest most of its assets in new issues. But that is about to change with the recent registration of the Hambrecht & Quist IPO & Emerging Company Fund.

The San Francisco-based newcomer will offer the public shares in a $300 million closed-end fund. The fund will invest 65 percent of its assets in new issues and 35 percent in other instruments.

Here's how it works: IPO shares are bought from a syndicate whenever possible as a company goes public, or else during the first 18 months of a company's public debut. The fund sells the shares it purchased within one year.

Hot Sector

IPO funds allow individual investors to gain entry into a hot sector to which they have little or no access. At the same time, some investors may eye them for the safety usually associated with mutual-fund investing.

Fund watchers caution, however, that historically IPOs have been a volatile investment. They do not think many more IPO funds will enter the market.

"Most studies have shown that IPO [funds] overall don't do very well," said Russ Kinnel, a senior mutual fund analyst at Chicago-based Morningstar.com. "They tend to have huge rallies and huge declines even more than typical small-cap growth funds. That's because the IPO market is so volatile."

Hambrecht & Quist plans to use a quantitative model developed by Symphony Asset Management, the company that will manage the fund. The model will help decide which issues to buy and to sell and when. Because Hambrecht & Quist is also an underwriter, Symphony would have to buy from other investment banks on occasions to avoid a conflict of interest.

Greenwich, Conn.-based Renaissance, by contrast, does not use a mathematical model but bases its selection process on in-depth analysis, says William Smith, the company's president and one of the three fund managers.

"Our mandate is to look at and analyze every single IPO that's out there, go to the road shows, and talk to competitors and suppliers," Smith said.

In addition to scrutinizing every stock, the fund managers research each sector before making a decision.

"Not only are we ranking and comparing the two closest comparable stocks, we ask if we should even be in retail right now," he added.

As of July 31, the fund had a year-to-date return of 31.02 percent. In 1998, the fund's first full year, it reported an 18.4 percent gain despite the August hit that dampened the rest of the market. Some of the fund's holdings include shares in E*Trade, Equant, Amazon.com and School Specialty.

The fund is allowed to hold the stock from an IPO for up to five years after the offering.

"We are not flippers," Smith said, adding that sometimes, when a stock falls and momentum players sell, Renaissance may decide to buy. "If you have done your homework and know this is an exceptional company, that's the time to start buying again," Smith said.

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