Canada's Longworth Says Hedge Funds Benefit Markets

Date: Wednesday, November 8, 2006
Author: Greg Quinn and Alexandre Deslongchamps, Bloomberg.com

Nov. 8 (Bloomberg) -- Hedge funds make Canadian securities easier to trade and allow investors to better manage risk by reducing price swings that aren't tied to changes in the economy, Bank of Canada Deputy Governor David Longworth said.

``Hedge funds have had a largely positive impact on the efficiency of financial markets in Canada,'' Longworth, 54, said today in a speech to this year's World Hedge Funds Summit in Vaughan, Ontario, just north of Toronto. ``There appears to be no reason to sound the alarm.''

Longworth didn't refer to the economic outlook for Canada or to interest rates.

A task force that reviewed Canadian securities legislation said Oct. 4 that hedge funds should be regulated in the same way as mutual funds to protect individual investors who are unfamiliar with their risks. The collapse last year of two hedge funds in Canada prompted the study, by a 12-member task force of the Investment Dealers Association of Canada, the self-regulator for the securities industry.

Hedge funds are loosely regulated investment pools, generally open only to high-net worth and institutional investors. The funds boost market liquidity and help make ``prices more reflective of underlying fundamentals,'' by adopting a wide variety of investment strategies, Longworth said.

Risks of hedge funds creating a snowball effect that causes price swings are mitigated by the range of investment styles used, he said. There is also little chance that a hedge-fund crash would spawn an economy-wide crisis, because financial institutions have become better at managing their risks, he said.

Amaranth Advisors

Norshield Asset Management (Canada) Ltd. and Portus Alternative Asset Management Inc. crashed last year. U.S. hedge- fund manager Amaranth Advisors LLC lost $6.6 billion -- the most by a hedge fund -- in September after Calgary-based trader Brian Hunter made wrong-way bets on natural gas prices.

Canada's hedge fund market in 2004 was estimated at C$26.6 billion ($23.5 billion) in assets under management, the Oct. 4 report said. That included C$10.9 billion invested by Canadian pension plans, C$14.1 billion by investors and the rest by foreign clients of Canadian hedge-fund managers, the report said.

Canada's provincial securities regulators will next year propose a registry for administrators of hedge funds, building on an existing list of hedge fund portfolio managers, Ontario Securities Commission Chair David Wilson told the Canadian Senate's banking committee on Nov. 1.

The committee is scheduled to hold another hearing on hedge funds at 4 p.m. today, including testimony from BluMont Capital President Steve Kangas.

Provincial Regulators

While the Bank of Canada monitors markets, provincial and territorial regulators are responsible for imposing rules on hedge funds, Longworth said.

``Let me quickly add that it is important for all these agencies to share information effectively, something we strive to do in Canada,'' he said.

The central banker discussed the trends in various markets, noting that volatility in fixed-income markets has dropped ``significantly,'' while it hasn't in others, including the currency market.

The Canadian dollar reached 91.44 U.S. cents on May 31, the highest since Jan. 4, 1978. The currency, which has surged 39 percent since 2002, rose to 88.66 U.S. cents at 12:42 p.m. Toronto time, from 88.52 cents yesterday.

To contact the reporter on this story: Alexandre Deslongchamps in Ottawa at adeslongcham@bloomberg.net ; Greg Quinn in Vaughan, Ontario, at gquinn1@bloomberg.net .