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Toronto hedge funds may take on New York


Date: Monday, November 20, 2006
Author: David Clarke, Investmentnews.com

OTTAWA - Could Toronto eventually take on New York as a hub for the North American hedge fund market?

Or is it doing so already?

After all, "Toronto's hedge fund industry is beginning to attract the attention of the capital markets community domestically and globally," said W. William Weeks, president of Toronto-based hedge fund analyst firm WWWoods & Co. Ltd.

"The number of funds under management has risen from around 50 in 1999 to over 200 in 2006, with assets under management in access of $40 billion [U.S.]," he added.

The Montreal-based Canadian Securities Administrators - Canada's de facto regulator - forces hedge funds to register, and more than likely, hedge fund administrators soon also will have to register. But the consensus is that they both can live with that (InvestmentNews, Nov. 13).

Toronto has a heritage of hedge fund administration, dating back to the days when hedge funds that wanted to escape the reaches of U.S. taxation had to satisfy the authorities of their adherence to the rule specifying administrative and marketing functions that had to be carried out wholly or largely outside the United States. These requirements were relaxed nearly a decade ago.

Now the shoe is on the other foot. Toronto-based Royal Bank of Canada is looking beyond the domestic Canadian market to broader opportunities throughout the Americas.

"With the trend on the part of institutional investors to adopt hedge fund or hedge-fund-like strategies and the overall institutionalization of the hedge fund market, we can see Toronto growing as a key hub for all of North America," said Mark Fieldhouse, director of technical sales and relationships for global products at RBC Dexia Investor Services in London.

"We expect these trends to produce double-digit growth over the next one to two years," he added.

It appears that the catalysts for this kind of increase already have been put in motion. In January, RBC and Luxembourg-based Dexia BIL SA completed the formation of their joint venture, RBC Dexia Investor Services, which combines their

institutional-investor-services businesses into an entity with nearly $2 trillion in assets under custody.

The joint venture will benefit from Dexia BIL's capabilities in servicing hedge funds for its parent company, Dexia Group of Brussels, Belgium. "In our platform, we'll be able to integrate our treatment of alternative investments," said Rob Wright, chief operating officer for RBC Dexia Investor Services. "We're well positioned to integrate hedge funds, alternative-investment and standard fund administration platforms."

Then in October, Toronto-based RBC Capital Markets, an international corporate and investment bank, announced that it had agreed to acquire the broker-dealer business and certain other assets of Carlin Financial Group in New York, a risk-based boutique broker-dealer that owns trading and execution services, and proprietary algorithms.

"We believe that this acquisition allows us to create a leading North American electronic-execution platform for investors and expand into multi-asset-class electronic trading," said Greg Mills, RBC Capital Markets' head of global-equity sales and trading.

"Emerging hedge fund managers, professional traders and other clients of Carlin Financial Group will continue to receive the same high quality of service they've come to rely on, and will now also have access to the full range of capital markets products and services we offer in the U.S.," he said.

RBC's move keeps it in step with the hedge fund industry's move to technology. According to a report titled "Securities Processing in Hedge Funds" by independent market analyst Datamonitor PLC, global hedge funds investment in information technology is predicted to reach $3.3 billion by 2009.

"The evolution of the hedge fund sector is somewhat inevitable. Hedge funds globally will look to use technology to improve execution capability in the front office as they seek competitive advantage. In addition, service providers need to raise the bar too by offering enhanced reporting functionality and superior connectivity to clients," wrote Nii Barnor, financial services technology analyst with London-based Datamonitor and author of the study.

But is the Toronto, overall, truly competitive with New York?

It seems likely. The Toronto CFA Society, formerly the Toronto Society of Financial Analysts Inc., boasts that with more than 5,000 members, it represents the second-largest society of financial analysts in the world, after New York.

Also, according to the London-based publication Hedgeweek, Toronto is "building on a thriving domestic-alternative-investments market and a well-resourced financial infrastructure to provide a relatively inexpensive option for administering Western Hemisphere hedge funds."