Regulation Won't Impede Canadian Boom |
Date: Wednesday, January 17, 2007
Author: Emma Trincal, Senior Financial Correspondent, Hedgeworld.com
MONTREAL, Canada (HedgeWorld.com)—New registration requirements in Canada are unlikely to hamper the rapid expansion of hedge funds in this country as Canada is now maturing into a "world-class alternative investment market," said James Niosi, vice president at NBCN Prime Brokerage, the prime brokerage arm of National Bank Financial, a Canadian investment bank based in Toronto and Montreal. "I am still interpreting what the new regulatory rules will mean for our market. It invariably means more paperwork and more costs. But I don't think it will slow down the growth pattern," Mr. Niosi said. A new rule released this week by the Canadian Securities Commission will force Canadian hedge funds to register with provincial regulators Previous HedgeWorld Story. "All funds registered in Canada are licensed with primary jurisdictions. However, not all of them are licensed with provincial securities regulators. They'll have to endure a little bit more short-term pain," Mr. Niosi said in an interview. But the new rule is not necessarily problematic because Canadian managers are already registered with one regulator or another, he said. Last week, NBCN Prime Brokerage released a survey on the Canadian hedge fund market based on a poll of 35 Canadian managers. The survey found that all of the hedge funds were already registered with one Canadian regulator, with 83% of the respondents saying that it was with the Investment Dealers Association (IDA), Canada's primary self-regulatory organization. The rest were for the most part registered with provincial regulators. "The large percentage of hedge funds registered with a regulator lends credence to Canada as a robust regulatory regime, especially when compared to other countries in the G7," according to the survey. Whether or not the regulatory structure of this market bodes well for its growth is debatable. What is clear though is that the essential driving force behind the Canadian hedge fund boom is the global commodity bull market. ‘We're now starting seeing the allocations coming in the hedge fund Canadian space," Mr. Niosi said. "Hedge funds are no longer a cottage industry in Canada." Between 2005 and last year, the number of Canadian hedge funds has grown by 25% to nearly 200. Assets under management during the same time have increased by 40% to $25 billion. Twenty-five billion dollars may be a small number when compared to the estimated $1.3 trillion size of the industry globally. The survey reports that nearly 30% of Canadian funds report assets under management between $10 million to $50 million. But the explanation lies in the "relative infancy" of Canada's hedge fund market. For instance, only 17% of Canadian hedge funds have been around for more than a decade, according to the survey. What makes the Canadian hedge fund market different from other areas in the world such as the U.S. and Western Europe is the fact that "Canada is a nation awash in natural resources and, as such, a market awash in commodity-driven alternative investments," according to the study. For starters, the commodity bull market has given rise to a significant number of mergers and acquisitions in the mining, oil and gas sectors in Canada. The study shows that more than half of Canadian-based hedge funds use strategies specific to futures and commodities. And since a growing number of investors are interested in commodity exposure, Canadian managers do not find it difficult to raise money. More than three-quarters of the managers polled in the survey (77%) said they will be looking to raise additional capital during the next 12 months. The result speaks to optimism but also to capacity and scale, Mr. Niosi said. "In the U.S., we're finding that more and more large names hit capacity and are not looking for additional capital and are doing hard or soft closes of their funds," he says. This is not a problem for investors in Canadian hedge funds, at least not now.
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