Maverick money |
Date: Saturday, June 2, 2007
Author: Karen Mazurkewich, Financial Post
Canadian hedge funds must still climb uphill to gain true respect
Allan
Jacobs is the latest hedge-fund convert. Named
manager
last year, his boss at Sceptre Investment Counsel Ltd. has given him the
green
light to start hedging.
Companies
must be "prepared to allow their portfolio managers room to flex or they
will
leave," says Sceptre's president and CEO Richard Knowles. He's seen it
happen
countless
times. Now, Sceptre -- a traditional firm that has long managed a
conventional
platform of funds -- is taking its first baby steps, of $27-million, in the
hedge
fund world.
For
Mr. Jacobs, launching a hedge fund was a no-brainer. At Sceptre, he vetted a
lot
of
great companies that were too small to be included in his existing equity funds.
By
setting up a small hedge fund with concentrated assets, "we would be able
to
take
advantage of these small companies," he says. The timing was also right.
"Canadian
pension funds are moving to alternative investments," he says. "We
needed
to set up a track record."
nothing
short of remarkable. The sector jumped from 610 funds with US$39-billion
in
assets in 1990, to 9,000 funds with US$1.3-trillion in assets.
For
much of that time, Canadian investors sat on the sidelines. Today, there are
still
only
200 hedge funds, with $30-billion in assets, in
institutions
traditionally have given them wide berth, Canadian hedge funds are
finding
traction outside the country. International institutions are drawn to their
heavy
interest in commodities. While that has made Canadian institutions take a
second
look at the industry, it has also raised alarm bells with the Standing Senate
Committee
on Banking, Trade and Commerce. Last year, it began hearings to
determine
whether hedge funds needed to be more regulated. The growth of the
industry,
and a couple of scandals, has put hedge funds under the spotlight.
Since
it was founded in 1996 by Frank Mersch and Norman Lamarche, former
mutual
fund stars at Altamira Investment Services, Front Street Capital has raised
$1.5-billion
in assets by parlaying their expertise in resource stocks. Overseas
investors
have rocketed
Salida
Capital. The Toronto-based company sells only one fund in
assets
of $183-million. The rest of its US$1.1-billion of assets under management is
from
institutions outside the country.
Greg
Boland, who manages a fund for Greenwich-based Paloma Partners, raised
$500-million
in capital earlier this year for his own offshore multi-strategy hedge
fund
with capital from -- you guessed it -- overseas institutions and
funds.
Despite
some spectacular returns, Eric Sprott, who invested heavily in uranium and
molybdenum,
says no Canadian institutions own his hedge funds.
"Financial
advisors [here] are misinformed about risk and concentration," says Mr.
Sprott.
"They always take a conservative view on things."
The
lumbering response by Canadian institutions to the Canadian hedge-fund
market
is a source of irritation. Having attracted outside interest, fund managers
want
to attract more Canadians. While many blame "docile" consultants for
the lack
of
interest, tight constrictions have also constricted the investment pool.
Gary
Selke, president of
investors
and advisors to make sound judgments." Hedge fund managers in this
country
can only sell to "sophisticated investors" willing to make a minimum
investment
of $150,000. He admits that the "opaque" nature of the
industry
has had an impact here.
Canadian
hedge funds have been tarred with the same brush as their American
counterparts.
For years, hedge funds were all lumped together as investments that
employ
"exotic" and risky" strategies. Tales of pirate tactics employed
by activist
managers
such as Daniel Loeb of Pirate Capital, and the colourful reports of fat
profits
and greedy consumption, made colourful headlines.
Not
surprisingly, the Senate Banking Committee is trying to get up to speed with
the
brave
new wave of funds. They have two concerns: that hedge funds can create
volatility
in the marketplace, and investors unfamiliar with the risks might loose
their
shirts. A parade of hedge-fund managers like Eric Selke, president of Front
Street
Capital, have trekked to
Don't
impose further "father-knowsbest" regulations.
Truth
be told, Canadian hedge funds are kinder, gentler versions of their
cousins.
Better described as "alternative funds," they short less than their
counterparts,
use less leverage, and avoid event-driven strategies. Whereas an
aggressive
overseas hedge fund might leverage 100% of its assets, the average
Canadian
fund's leverages range from about 15% (
position)
to 50% (the maximum that Goodman & Co. will take), making them less
volatile.
Hedge
funds are less regulated, which means managers can tap into a host of
strategies
to generate higher "alpha" returns for their clients. They also work
through
"incentive fees." Hedge-fund managers can cream 20% in profits if
they
perform
over a certain benchmark, whereas mutual-fund managers must be content
with
2% to 3% management fees. It can be their pot of gold. In fact, the term
"hedge
fund is a misnomer that can mean anything that's a non-mutual fund," says
Rohit
Sehgal, chief investment strategist at Goodman & Co.
Still,
two controversial scandals in 2005 did not help dispel fears. Portus
Alternative
Asset
Management, which boasted $800-million in assets under management, had
its
licence withdrawn by the Ontario Securities Commission after numerous
allegations;
and Norshield Financial Group allegedly transferred $500,000 to
Caribbean
banks instead of investing in
"Sadly
we are going to have setbacks in the alternative space like any other sector,
but
it's behind us," says Lionel deMercado, managing director and global head
of
equity
finance for TD Securities. "I believe there are more controls in place
now," he
adds.
"Unfortunately, it happened, we learned, and we drive on."
Mr.
deMercado is so bullish about the Canadian hedge-fund industry that last month
he
organized a forum where four pension managers spoke to a crowd of 90 hedge
funds
about their strategies. Although Mr. deMercado won't say how many hedge
funds
his brokerage firm represents, he says the industry is evolving. The biggest
change
he has seen is the willingness of wealth management companies and even
mutual
fund companies to run hedges. Everyone from Goodman Inc. to Gluskin
Sheff
& Associates have folded them into their portfolios.
"People
are beginning to understand the benefits of hedge funds within a diverse
portfolio,"
says Andrew McCreath, president and CEO of Waterfall Investments Inc.
"That
message is gradually leaking out and is responsible for the growth," he
says.
One of
the advantages, hedge funds here have is that they can profit from the
greater
inefficiencies in the domestic market due to the fact that Canadian
companies
have fewer resources to research and analyze data.
In
Goodwood
Inc., are even taking an activist role. "They are helping to eliminate
inefficiency
by forcing a sleepy company to do something," says Mr. McCreath.
Still,
not everyone in the financial community is a fan. The most outspoken on the
subject
is Stephen Jarislowsky. He calls hedge funds "scum" for forcing
companies
into
making quick decisions that don't always benefit the shareholders. And while
many
in the industry think the Canadian hedge funds will grow, William Holland,
CEO of
CI Financial Income Fund Ltd., takes a more contrarian position: "I'm of
the
view,
I think they've peaked."
kmazurkewich@nationalpost.com
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