GMP Capital plans to launch hedge fund

Date: Tuesday, December 18, 2007
Author: Andrew Willis, Globefund.com

GMP Capital Trust is launching a $50-million hedge fund co-headed by star trader Michael Wekerle, the investment dealer's latest strategy for expanding its asset management business.

Toronto-based GMP is expected to announce as early as today that it will run a multi-strategy fund in the new year, according to sources at the dealer. The firm will put up $20-million, employees will add their own money and outside investors will be invited to join.

GMP is following a blueprint drawn up by houses such as Goldman Sachs Group Inc., which gleans more than half its revenue from smart investments with its own capital. All the major Canadian dealers also have proprietary trading funds that use hedge fund strategies.

Mr. Wekerle, who co-founded GMP in 1995, will continue to head the equity team while also working on the new fund. There had been chatter in recent months that he planned to leave the desk. The firm has deepened its ranks, hiring or promoting senior traders and putting them in charge of specific sectors, such as energy and mining stocks.

GMP poached TD Securities veteran Jason Marks to co-found the fund, and will move financial services analyst Tim Lazaris into the unit. While Mr. Wekerle will remain on the GMP desk, the rest of the group will work on a different floor to better manage the potential conflicts between client orders and the hedge fund's buying and selling.

If the fund can build a successful track record, sources at GMP say they anticipate it will attract support from wealthy individuals and outside institutions such as pension funds, which have embraced alternative asset managers in recent years.

Since going public four years ago, GMP has steadily added asset management units to its existing stock trading and corporate finance divisions. Analysts say the dealer needs to expand its operations this way. Atul Shah of BMO Nesbitt Burns warned in a recent report: "In the event of a prolonged capital markets slowdown, especially in the resources sector, GMP's valuation would be vulnerable."

GMP's two other asset-management ventures have become major players in their sectors. The homegrown network of stockbrokers now oversees $4.3-billion of client assets. Private equity unit EdgeStone Capital Partners boasts industry leading returns on its $1.5-billion portfolio.

The new hedge fund is expected to deploy four investment strategies. There will be a traditional equity trading approach that includes taking long and short positions, which fits the skills of Mr. Lazaris and Mr. Wekerle. The fund will also do credit trading, which would include buying distressed debt, plus what's known as program or algorithmic trading and options-based volatility investing, all areas that Mr. Marks built or oversaw in a 16-year career with Citigroup and TD Securities.

Giving traders such as Mr. Wekerle a new outlet for their talents, and hiring respected outsiders such as Mr. Marks, is considered a way to better retain and attract talent to GMP, sources said. Many dealers have lost top employees to hedge funds, which offer eye-popping pay packages because of performance-based compensation schemes that typically sees managers keep 20 per cent of the profits. They often invest their own capital, as well.

The Canadian hedge fund industry is viewed as in its adolescence, with 200 money managers overseeing $30-billion. The more mature U.S. industry has about 9,000 players investing $1.3-trillion (U.S.)

Successful hedge funds created by domestic dealers include three-year old Flatiron Capital Management Partners, a $350-million (Canadian) fund backed by National Bank Financial and staffed by its former employees.