market folly

A recent Australian initial public offering (IPO) has caught the eye of many prominent hedge funds. QR National (ASX: QRN), Queensland Rail's primarily coal network in Australia, recently became public with the backing of various new hedge fund owners. Shares IPO'd at AUD $2.55 and are now trading around AUD $2.77. It priced at the low end of the range and the Queensland government is left with a 40% ownership stake after the IPO raised $4.5 billion.

Adam Weiss and James Crichton's Scout Capital has disclosed a 5.1% ownership stake in QRN with 124 million shares (around a $316 million stake). We also recently detailed how Scout boosted its stake in Coca-Cola Enterprises (CCE). The Children's Investment Fund has also disclosed a 6.1% ownership stake in QRN with a $316 million position. Overall, 46% of QRN's recently IPO'd shares went to overseas investors with the buzz being that numerous other hedge funds have smaller positions.

Interestingly enough, a lot of domestic Australian long-only fund managers avoided the IPO as many argued it was overpriced. Hedge funds have clearly disagreed. Although we haven't been able to verify it yet, it's been rumored that Richard Perry's hedge fund Perry Capital had also taken a stake in the IPO. QRN is Australia's largest IPO since Telstra (Australia's monopoly phone carrier).

The propensity for hedge funds and investment managers in general to gravitate toward railroad plays is interesting. Some see these companies as attractive due to the oligopolistic nature of the business. Others fancy rails as plays on commodities, energy, or an economic recovery. Hell, Warren Buffett's Berkshire Hathaway even acquired rail company Burlington Northern Santa Fe in its entirety. And in the just released new issue of our Hedge Fund Wisdom newsletter, we see that many managers own shares of rival rail Union Pacific (UNP). And in Australia, this theme continues as QR National seems to be a play on coal.

Taken from the company's website, QR National is "QR National is the largest rail freight haulage operator in Australia by tonnes hauled, operating in key freight sectors and supply chains across the country. We are focused primarily on large, heavy haul rail tasks such as the transportation of coal, iron ore, other minerals, agricultural products and general freight as well as containerised freight."