Value Catalyst Fund - Interim Results.

(From AFX CNF)

RNS Number:0417U Value Catalyst Fund Limited (The) 30 March 2007 The Value Catalyst Fund Limited Unaudited Interim Report For the period from 1 July 2006 to 31 December 2006 Investment Manager's Report For the six months ended 31st December, 2006 the Net Asset Value ("NAV") of The Value Catalyst Fund Limited ("VCF" or the "Company") grew by 12.58% (with dividends reinvested). For the twelve months to the 31st December, 2006 the NAV grew by 17.20% (with dividends reinvested). For the period from inception to the 31st December, 2006 the Company's NAV has increased by 145.79% (dividends reinvested). Over the last year we have come across one particular problem time and time again. We have identified a company we like, spent considerable time and effort working up models, developed a strategy and then started to buy a position. What happens next, the share takes off. At least to levels that makes us put our hands back in our pockets. "Great!" might be your response, "Damn!" is ours. Yes, this makes money but a fraction of what we would have hoped for if we had managed to build up a position. Never before have we felt such a high level of liquidity all around us, as we do now. This may be no huge surprise and as an activist I think we are well placed to make money out of such a phenomenon, but where has it all come from? We can't say with any certainty, but we have done some numbers on the back of an envelope that might help you think about some of it. What is the market capital of all stock markets put together in the world? Well, we know it was $43 trillion in March 2006 and with the market up a bit from there, let's say $45 trillion. How big is the hedge fund industry? Again, numbers vary but $2.5 trillion of net assets seems close and for the Private Equity world, slightly less perhaps at circa $1.5 trillion. This $4 trillion has come from many sources but we think it is fair to say that five years ago a good proportion of it, if not most of it, would have been in some form of traditional equity fund. Our point is that a massive multiplier applies when one $ gets taken out of a traditional fund and placed into a hedge fund or private equity. We think that there could be as much as $10 trillion of leverage to add to that $2.5 trillion of net assets. An extra $10 trillion goes a long way and if we add in leverage that's available for the Private Equity world as well, it is no surprise it has trouble squeezing into the total of $45 trillion. Now, we have ignored oil wealth and we all know the Middle East has been buying assets around the world, and also ignore property leverage, We also know that the move lower in markets towards the end of February was in reality a very small move but one that seemed to cause much anxiety. A 5% market move should not concern us as investors but if the leverage in the markets is so high that it translates into much nastier numbers for some, we perhaps have an explanation for the level of anxiety it caused. Something we have not been able to find out is the percentage of the market that is bought on debt. If anyone knows such numbers we would be interested to learn them. The practical implication of all this to us is how we hedge our portfolios and what risk we take. We would also make a distinction between financial leverage i.e. what do we borrow from the bank and asset leverage i.e. what kind of derivative exposure do we need to add back to get a true picture. We have seen numbers for financial leverage but we believe it massively underestimates the asset leverage. In reality we have continued to …