Will 2007 be year of the hedge?

Date: Monday, December 18, 2006
Author: Keith Damsell, Mutual Funds Reporter, Globe & Mail

Canada's fledgling hedge fund industry has its fingers crossed that 2007 may finally mark a breakthrough with the elusive retail investor.

"There will be some attention given to alternatives," said Jeffrey Shaul, the founder, president and chief executive officer of Robson Capital Management Inc. The Toronto money manager is marketing products tied to the performance of marquee U.S. funds managed by Van Eck Absolute Return Advisors Corp. and Everest Capital Ltd.

"Brokers have to look more broadly and focus on more products," Mr. Shaul said. "We think we are offering something others are not."

It's the first time in a while there is cause for optimism in Canada's $20-billion retail hedge fund sector, which is a fraction of the $646-billion invested in mutual funds. The retail hedge fund business all but dried up in the wake of the well-publicized Portus Alternative Asset Management Inc. and Norshield Asset Management (Canada) Ltd. scandals in 2005.

The convergence of several positive factors has hedge fund managers thinking the tide may soon shift, said Miklos Nagy, chairman of Canadian Hedge Watch Inc. and president and chief executive officer of Quadrexx Asset Management Inc.

First, memories of the Portus and Norshield debacles are beginning to fade and regulators are expected to soon introduce new sales rules that will further ease concerns.

In addition, the bulk of Canada's hedge funds invest in the commodities sector and a volatile year has contributed to above-average returns. There's some agreement that North America's soaring equity markets have little room to grow, prompting investors to consider alternative asset classes.

And finally, looming tax rules for the income trust sector mean investors must look elsewhere for yield and income, he said.

"Advisers and investors are looking for other opportunities. That sector [income trusts] was sucking up a lot of money . . . that money is still there and needs to be invested somewhere," Mr. Nagy said.

Nevertheless, the financial-advice community remains wary of the asset class. Assante Wealth Management Ltd., one of Canada's largest financial advice firms, will not sell hedge funds to its clients.

"If I am 72 years old and I'm looking for a steady 6- to 8-per-cent yield, I'm probably going to dividend stocks, dividend funds, principal-protected notes or something that I can understand," said Joe Canavan, Assante's chairman and chief executive officer. "If I get into an exotic vehicle, that's not really helping me, it's causing me to lose sleep at night."