Canadian hedge funds Well positioned to receive greater share from global Institutional investors

Date: Tuesday, January 9, 2007
Author: National Bank Financial

Study shows Canadian hedge funds maturing into a world-class investment option

MONTREAL, Quebec – January 9, 2006 – Canadian hedge funds are developing into a world-class alternative investment opportunity benefiting from the most recent resource boom and offering a strong overall return within a well-regulated market. These findings come from a new study sponsored by NBCN Prime Brokerage Services, a specialized alternative investment service offering from National Bank Financial.

“This research fills an essential need for more information on the Canadian hedge fund space and makes it clear that, while the Canadian hedge fund market is maturing, it still has plenty of room to grow,” said James Niosi, Vice President, NBCN Prime Brokerage. “The global commodity boom, Canada’s exposure to resources, significant mergers and acquisitions and the strong Canadian dollar have catapulted Canada onto the global investment radar screen, generating significant interest in Canadian hedge funds globally.”

A snapshot of Canadian hedge funds

The Canadian hedge fund research, sponsored by NBCN Prime Brokerage and conducted by Global Custodian, an information and solution provider in international securities services, is based on a survey of 35 hedge fund managers in Canada, the results of which were then compared to responses from 2,451 hedge funds around the world.

Not surprisingly, the research found that Canadian hedge funds are smaller than hedge funds in the rest of the world. Nearly 30% of Canadian hedge funds report assets under management between $10 and $49 million and only 4% have assets greater than $5 billion. In comparison, only 10% of global hedge funds have assets under management between $10 and $49 million and 21% report their funds to be larger than $5 billion.

The small size of Canadian hedge funds can probably be explained by the relative infancy of Canada’s hedge fund space. Only 17% of Canadian hedge funds have been established for 10 or more years, while a third of all hedge funds in the world have been established for more than 10 years.

Global hedge funds also draw from a much more diverse pool of resources. For example, 11% of global hedge fund assets come from banks and insurance companies, a source from which Canadian hedge funds receive less attention. Canadian hedge funds also rely on their partners and employees for 25% of their funding, a group that represents only 8% of global hedge fund allocations.

Canadian hedge fund strategies

Buoyed by exponential growth in the demand for commodities throughout the world, 77% of Canadian hedge fund managers said they will be looking to raise additional capital over the next 12 months. More than half (54%) of these Canadian hedge fund managers said they will use futures/commodities strategies, compared to only 22% for global hedge funds.

But Canadian hedge fund managers are not focused entirely on Canada. In fact, 40% said they were active in Western Europe, 20% in Japan, 15% in Asia (excluding Japan) and 15% in Central Europe.

Half of the survey respondents (46%) also said they were using synthetic structures like swaps, forwards and options. The largest single strategy used by hedge fund managers remains that of long/short equity.

“Our survey made it clear that Canadian hedge fund managers are leveraging Canada’s positive economic growth,” said James Niosi. “Hedge funds are no longer a cottage industry. The number of Canadian hedge funds has grown by 25% and assets under management have grown by 40% to $25 billion between 2005 and 2006.^[i] We believe that the Canadian hedge fund industry has matured to the point where it is a world class alternative investment market.”

About NBCN Prime Brokerage

NBCN Prime Brokerage Services is a specialized service offering for alternative investment funds and fund managers across equities, options, fixed income, foreign exchange, equity derivatives and equity finance. Its Synthetic Prime Brokerage offering includes swaps, forward transactions as well as customized fund structures and solutions. With an established offshore hedge fund marketing group and PrimeVue™ technology adapted to the unique needs of hedge fund managers, NBCN Prime Brokerage offers the collective power of National Bank Financial Group to hedge fund managers, enabling them to supplement commoditized products and services with other asset structures, customized solutions and transactions.

About National Bank Financial

National Bank Financial (www.nbfinancial.com) is a leading Canadian full-service investment bank, with origins dating back to 1902. National Bank Financial has over 3,400 employees with offices and operations in Canada, Switzerland, the US, and the United Kingdom. The firm offers financial services and products to private and publicly owned corporations and institutional investors, individual investors and government agencies. National Bank Financial has 86 retail offices across Canada and through NBCN (www.nbcn.ca) is the largest correspondent clearing firm in Canada providing a full range of trading, clearing and administrative services to independent financial services organizations.