This article was published on Thursday at 7.30pm and updated throughout Friday.

Update: Elliott Associates, the much feared and respected US activist hedge fund, has emerged with a 5% stake in Scottish Mortgage Trust (SMT ), putting pressure on the UK’s biggest listed equities fund to improve returns to shareholders.

In a post-market disclosure to the stock exchange on Thursday, the Delaware-based investment firm revealed it had bought nearly 0.5%, or 6.5m shares, in the Baillie Gifford flagship with a further 4.57% in equity swaps to take it just over the 5% reporting threshold on Tuesday.

The £607m holding is understood not to be a new position but one that Elliott has built up over some time. Elliott declined to comment but sources familar with the situation said on Friday it had invested last year.

They also revealed that Elliott had been in contact with Scottish Mortgage and that the board’s launch of a £1bn share buyback was a result of their dialogue.

‘Elliott has engaged in private discussions with the company in recent weeks. It’s understood to be supportive of the buyback programme,’ the source said.

A statement from Justin Dowley, chair of Scottish Mortgage, said: ‘The board and managers have been actively considering increasing the level of buybacks over the past two years.’

Alliance’s nemesis

Founded in 1977 by Paul Singer, Elliott is best known for buying distressed emerging market bonds and pursuing Peru and Argentina through international courts when they defaulted on their debts. Closer in time and space, last month it made a takeover approach to electrical retailer Currys (CURY)

In the UK investment company market, the firm is fondly remembered, by most, for its campaign against Alliance Trust (ATST ). Over a six-year period, starting in 2011, it built a 20% stake in the underperforming global equities fund and obtained two seats on the board in 2015 before ousting chief executive Katherine Garrett-Cox.

Under a new board, Elliott’s stake was bought back, generating a decent uplift for the hedge fund, although one that had taken a long time to achieve.  The trust’s investment platform and fund management business were sold with the company adopting a multi-manager investment approach under its current adviser Willis Towers Watson. 

Whether Elliott will mount a similar campaign against the even more widely-held Scottish Mortgage is unclear, but having engaged with the board it is likely to keep up the pressure for changes that will narrow the discount and lift the share price further.

Stifel analyst Iain Scouller said: ‘The board may be hoping Elliott trades out of the shares in the market if the discount continues to narrow. However, we think this is unlikely and suspect Elliott may come up with a list of suggestions as to how the board can improve “shareholder value” in due course.’ 

The buyback programme, while impressive, may not be large enough to shift Elliott, Scouller suggested, given it now is equal to 8.2% of the company following this week’s price rise, making it look ‘relatively modest’ compared to Elliott’s stake. 

Elliott’s contact with the board already shows it is taking a different approach to rival US activist Saba Capital. It made an estimated 30% return buying and later selling a stake last year. It did so without challenging the directors or its manager Baillie Gifford, who at the time were reeling from a public row with Amar Bhidé, a former non-exe who questioned the fund manager’s abilities on private equities.

Despite a partial recovery in the past nine months, the investment trust remains somewhat vulnerable to attack, having seen its impressive performance both before and after the pandemic, disappear in the 2022 growth selloff. Its 26% exposure to unquoted companies has also caused concern and led to the shares falling to a 15% discount.

However, the buyback demonstrated the conviction of the fund managers and the board in the prospects for its portfolio.

Elliott enjoys rally

The timing of Elliott’s disclosure was intriguing coming just days after Scottish Mortgage kicked off the big two-year buyback programme with stock purchases. The news has helped the trust rally nearly 11% since last Friday with hopes of a cut in US interest rates propelling its shares 2.6% on Thursday to close at 865p.

That’s narrowed the gap, or discount, between the share price and net asset value from 15% to 8%, giving Elliott a good return on its stake depending on precisely when it invested.

The shares, up another 1.2% to 875p, on Friday are comfortably off last May’s low of 621p but well below the November 2021 peak of £15.28.