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Herzfeld plans to launch $300 million Cuba hedge fund
CubaNews / December 2007

By Larry Luxner

For years, Tom Herzfeld has been known as the guru of closed-end funds. His Herzfeld Caribbean Basin Fund, inaugurated in 1994, trades on Nasdaq under the CUBA ticker, and puts its investors’ money into companies likely to benefit from an opening in U.S. relations with Cuba.

In late July, Herzfeld’s Miami-based firm, Thomas J. Herzfeld Advisors, registered with the Securities and Exchange Commission for a proposed non-transferable rights offering to holders of the fund’s common stock (see CubaNews, August 2007, page 3).

Now the company plans to launch a $300 million hedge fund that seeks to capitalize on future opportunities in Cuba — the ultimate emerging market.

The new venture, dubbed Havana Partners, is to be ready by first quarter 2008. It will be managed by Herzfeld’s son, Erik Herzfeld.

“Our existing closed-end fund is an on-shore retail product geared toward retail investors,” said the younger Herzfeld, who joined his father’s firm in March as head of alternative strategies. “Institutional investors won’t get involved in closed-end fund. That’s not really their game, and we had a lot of in-quiries asking whether we’d offer something for them as well.”

Herzfeld, who used to run JP Morgan’s currency business in Asia on the derivatives side, said he sees Cuba as the next Vietnam.

“Cuba is one of the last communist countries. In our view, it is going to be the next one to topple, and there should be an incredible amount of [investment] opportunities there,” he told hedge-fund newsletter FINalternatives.

In a subsequent phone interview with CubaNews, Herzfeld said the new fund might be used to make private-equity investments.

“My background is in emerging markets, and it was a nice bet between my interests, the firm’s expertise and the direction we see the Caribbean in general going,” he told us. “Our strategy will be to look at other products like fixed-income, currencies and bonds — not just stocks.”

Havana Partners will charge a 2% management fee and a 20% incentive fee, with a $1 million minimum investment requirement.

But since U.S. institutional investors cannot put their money directly in Cuba, Havana Partners will have to take its chances with other Caribbean Basin countries such as the Dominican Republic and Panama.

“The Panama Canal is widening, so there’s going to be a lot more cargo and shipping coming through, and the cheapest form of transportation is rail and ship, so you’re going to see a lot more tankers go through there in a few years,” he told FINalternatives.

Havana Partners is not the only fund of its type that’s been proposed in recent months. INTL Consilium LLC, based in Fort Lauderdale, manages a privately placed fund begun three and a half years ago. The company manages $520 million worth of investments in sovereign bonds, corporate bonds, stocks, local-currency bonds and private equity (see CubaNews, November 2006, page 4)

A few months ago, we reported on the Cuba Study Group’s proposed Cuban Enterprise Fund, a $300 million fund aimed at helping start small businesses in a post-Castro Cuba (see CubaNews, September 2007, page 1).

“The difference between us and the others is that we have a 15-year track record of investing in the Caribbean and companies poised to benefit when the embargo is lifted,” said Thomas Herzfeld. “We are not a startup company. We’ve been in business a long time. A lot of people would like to do what we’re doing, and I’m sure many will — but we’re on very solid footing.”

Herzfeld, writing in his company’s 2006 annual report, said “our portfolio strategy remains unchanged. We seek to invest in companies that we believe will do well even if the trade embargo with Cuba is not lifted.

“But at the same time, we place emphasis on companies which will benefit from resumption of trade with that country. Once U.S. law permits, we will consider direct investment opportunities in Cuba — not only in the country’s traditional industries, such as sugar, rum, tobacco, mining, tourism and fisheries, but also in new areas, such as ethanol.”

The Herzfeld Caribbean Basin Fund, worth $8.5 million at inception, is now valued at over $16.5 million. Its share price peaked on Jan. 22 of this year at $17.76 per share, while net asset value (NAV) hit $10.01 in early July. The fund’s NAV as of Nov. 13 stood at $9.55.

As of Dec. 31, 2006, the fund’s top holdings were in Florida East Coast Industries. (21.42% of total); Seaboard Corp. (9.15%); Consolidated Water Co. (8.73%); Watsco Inc. (5.59%) and Florida Rock Industries Inc. (5.29%).

“From my own account, I bought over $1 million in stock, and my son Erik bought $250,000,” said the elder Herzfeld, “so we’re great believers in the Herzfeld Caribbean Basin Fund.”

On Nov. 1, Herzfeld announced that the fund’s recently completed one-for-one, non-transferable rights offering was over-subscribed, raising $18 million after deducation for expenses related to the offering.

The fund will issue 1,812,392 shares at a final subscription price of $10.04 per share, which represents 85% of the average volume-weighted closing sale price at which shares of the fund traded on Nasdaq on the expiration date of Oct. 26 and the preceding four days.

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