Bank of Canada applauds hedge funds

Date: Thursday, November 9, 2006
Author: Keith Damsell, Globeandmail.com

The embattled hedge fund industry received a ringing endorsement from an unlikely source yesterday -- the Bank of Canada.

"Hedge funds have had a largely positive impact on the efficiency of financial markets in Canada," deputy governor David Longworth told a hedge funds conference north of Toronto. "There appears to be no reason to sound the alarm."

Hedge funds reduce financial volatility and aid market liquidity, Mr. Longworth said in his remarks. Risk is limited thanks to the varying investment strategies of large hedge funds and the risk management practices of banks, he said.

"Risks become more effectively managed," he said. "It's useful to note that the largely positive influence of hedge funds stems from their sophistication, their size, the diversity of their objectives and strategies, and the instruments they use."

Hedge fund executives said it was refreshing to hear a factual overview of Canada's $30-billion industry, especially in the wake of a series of well-publicized scandals. Portus Alternative Asset Management Inc. and Norshield Asset Management (Canada) Ltd. are in receivership with investors owed hundreds of millions of dollars. In the U.S., Amaranth Advisors LLC lost about $6.6-billion (U.S.) in September on disastrous wrong-way bets on natural gas by Calgary-based energy trader Brian Hunter.

"I am delighted to see anybody stand up, particularly the Bank of Canada, and give a glowing report of the nature of the business and the positive impact it has on capital markets. No one could be unhappy about that," said Tristram Lett, deputy chairman of the Alternative Investment Management Association of Canada and managing director of Toronto money manager Integra Capital Management.

The Bank of Canada's remarks "make sense . . . they are accurate and correct," said Robert McWhirter, president and portfolio manager of Toronto alternative asset manager Selective Asset Management Inc.

"The Bank of Canada gets it," agreed Gary Selke, president of Toronto's Front Street Capital, manager of close to $3-billion (Canadian) in hedge fund assets. Recent scandals have more to do with fraud and risk management than the principles of hedge fund investing, he said.

"The people who don't understand [hedge funds] don't really understand how the market works," Mr. Selke said. "People who are concerned about the big bad wolf out there, that's a paper tiger. There is no issue."

Managers said demand is strong and returns are improving. The bulk of Canadian hedge funds hold long and short positions in commodities and current volatile conditions mean strong returns.

"Business is very good, thank you very much," Mr. Selke said.

A parliamentary committee is currently studying the hedge fund industry, just a few weeks after a private sector task force proposed new regulations that would make the higher-risk funds more accessible to retail investors.