Nov. 5 (Bloomberg) -- Andrew Barker and Raymond Maguire, two former UBS AG managing directors, plan to start a global transport fund with the backing of Tufton Oceanic Finance Group, manager of the world’s largest shipping hedge fund.

Tufton Transport Investment Fund is scheduled to start investing in early January, Hong Kong-based Maguire, the co- chief investment officer with Barker, said in an interview yesterday. It will seek to generate 15 percent to 20 percent annual returns by trading pairs of transportation and related infrastructure stocks outside the shipping industry.

While asset managers including Warren Buffett are investing in transportation stocks to wager on an economic recovery, the new Tufton fund will seek to profit from valuation gaps in shares without having to bet on the market’s direction.

“The nature of the transport industry means there’re always going to be opportunities because of the sub-sector diversity and mispricings,” said Maguire, 36. “One can play hyper-cyclicals at one end of the spectrum, like airlines. You can play bond-like investments on the other side, like airport infrastructure.”

The new fund will have the capacity to manage as much as $2 billion, he added, declining to give a target start size or Tufton’s commitment. It will be the first known global transport fund that invests in industries ranging from airlines, airports, aerospace, railway, bus, logistics, to toll roads, Maguire said.

Buffett’s Berkshire Hathaway Inc. agreed this week to pay $26 billion for the 77.4 percent of railroad Burlington Northern Santa Fe Corp. it didn’t own.

Barker, Maguire

London-based Barker, 44, founded and headed UBS’s global transport research team between 1992 and 2002. He was a member of the management board of Easyjet Plc, Europe’s second-largest discount carrier, between 2005 and 2008, according to an official profile given to potential investors.

Maguire succeeded him as head of the UBS research team between 2002 and 2006. He was most recently a Hong Kong-based managing director of the Swiss bank’s proprietary trading desk.

Tufton, based in London and founded by Ted Kalborg in 1985, manages about $2 billion of assets, including the $1.5 billion shipping and energy-focused Oceanic Hedge Fund which has generated a 17 percent annualized return since its birth in 2002, Maguire said. Kalborg and chief investment officer Cato Brahde will be senior advisers to the transport fund.

The growth of “niche funds” like Tufton Transport shows that managers with access to better, more detailed or specific information about an industry or firm would outperform, said Ed Rogers, chief executive of Tokyo-based hedge fund advisory firm Rogers Investment Advisors Y.K.

‘Deep Knowledge’

“We should expect to see ever more ‘specialized’ hedge funds where analysts with deep knowledge of a particular industry, or group of companies, are able to form a vehicle that can invest or traded based on that superior knowledge,” he said.

The transport industry’s under-representation in major stock indexes has led most general equity funds to hold few transport stocks. That means transportation stocks tend to move less in tandem, providing more opportunities for stock pickers, said Maguire.

In periods of macroeconomic, oil price and credit supply shocks, transport stocks’ correlations increase, said Maguire. That allows for better hedging with offsetting long and short investments, he said. Shorting involves selling borrowed shares.

The new fund will seek to exploit the “valuation dislocation” of transport stocks, Maguire said, referring to pricing differences between companies that are not justified by their prospects.

V-Shaped Recovery

“If we do see a V-shaped recovery, we have identified companies that will benefit,” Maguire said. “Conversely many companies in this space do not have the balance sheets to support the growth that would be needed. We look to take advantage of such disparities.”

Should a so-called sharp economic rebound fail to materialize, “then you have companies that are often 30, 50, 100 percent off the lows but still have a very fragile balance sheet and now have become a lot more expensive,” he said.

The transport fund team has identified about 200 companies that satisfy its minimum requirements for daily trading volumes, low correlations in normal market conditions and can be used for hedged trades even in “highly stressed” markets, Maguire said. They have a combined market value of $1 trillion and daily trading volume of $7.5 billion, he added.

Half in Aviation

About 50 percent of the eligible stocks are in Asia-Pacific, including 20 percent in Japan. The rest of are split between the U.S. and Europe, said Maguire. About half of them are in the aviation industry.

The fund uses fundamental research of company information to identify about 5,000 potentially profitable pair trades using those stocks, which also have low correlations in normal market conditions and allow hedging in market shocks, Maguire said.

Pair trades typically make offsetting long and short investments in a pair of related stocks to bet the divergence from their historical price relationship will either narrow or widen.

For example, the fund may pair Japan Airlines Corp. with All Nippon Airways; Boeing Co. with European Aeronautic Defence and Space Co.; and FedEx Corp. with United Parcel Service Inc., Maguire said.

The fund will invest in 20 to 30 pairs of companies at any given time, he added.

To contact the reporter on this story: Bei Hu in Hong Kong at bhu5@bloomberg.net.

Last Updated: November 5, 2009 06:16 EST