Resources seen as key hedge fund attraction

Date: Thursday, October 11, 2007
Author: Shirley Won, Globe and Mail

TORONTO -- Canadian hedge fund managers oversee about $20-billion in assets, but can add octane to their growth by playing the resource card to tap foreign investors, says the chairman of the industry association.

"Canada externally is perceived as a resource play," said Phil Schmitt, who heads the Canadian chapter of the Alternative Investment Management Association (AIMA).

"It's easier to sell that" as foreign investors recognize there is a unique investment in this country, he said yesterday after a speech to a Hedge Funds World Canada conference.

"Once you hook them in, you can say we've got a great banking structure and technology industry, and there is a lot of opportunity to trade, and get returns from those non-resource sectors as well."

While there is about $30-billion in total hedge fund assets in Canada, about one-third is run by foreign managers hired by Canadian companies to participate in funds of hedge funds, said Mr. Schmitt, who is also president of Summerwood Group Inc.

Canada's growth in hedge funds has lagged the rest of the world, though it has picked up in the past five years.

A common statistic is that 65 per cent of roughly $2-trillion (U.S.) in the world's hedge fund assets lie with the top 100 of about 9,000 managers, he said. That means that around 8,900 firms vie for the remaining 35 per cent of assets.

"There is a whole lot of competition for that balance. It is not a Canadian problem."

Single Canadian hedge fund managers can have a tough time in the domestic market because institutional clients gravitate to firms selling funds of funds, while attracting high-net-worth clients often depends on personal contacts, he added. "If you are dependent on retail to grow your firm, that's too restrictive."

Under Canadian rules, only sophisticated or wealthy individual investors can put money into hedge funds.

Mr. Schmitt said consolidation could eventually come to the industry as players try to fill gaps in their product lineup in a bid to appeal to all investors, including foreigners.

Hedge fund scandals and allegations of fraud at Portus Alternative Asset Management Inc. and Norshield Asset Management (Canada) Ltd. in 2005 were a "setback" for the Canadian industry, but "I think we are beyond that now," he said.

Mr. Schmitt expects Canada's mutual fund industry to expand into the hedge fund arena. "Once you've got your client, you don't want to lose your client to another platform, and it's also a higher-profit-margin business."

Dynamic Mutual Funds, whose parent DundeeWealth Inc. is the target of a $3.2-billion (Canadian) hostile takeover bid by CI Financial Income Fund, is one player that has been aggressive in launching hedge products.