Canadians called more sensitive to domestic market

Date: Monday, November 26, 2007
Author: David Clarke, Pensions&Investments

MONTREAL — Canadian investment professionals are more critical than outsiders of the Canadian marketplace, said Jon Stokes, of the Charlottesville, Va.-based CFA Center for Financial Integrity.

Mr. Stokes was speaking at the World Alternative Investment Summit in Montreal earlier this month. The summit was sponsored by Toronto-based Canadian Hedge Watch Inc. and co-sponsored by the Dubai International Finance Centre.

Another speaker, Ian Russell, president and chief executive officer of the Toronto-based Investment Industry Association, gave his plans to restore confidence among Canadian professionals. They included establishing “a national securities regulator — the federal and provincial governments need to work together to lower the regulatory burden in capital markets, and improve our competitiveness.” Mr. Russell also advocated a “principle-based — not rules-based — regulatory regime, a … system that facilitates efficient markets while ensuring fairness.”

Blowups

That critical eye extends to hedge funds. Despite being more closely regulated in Canada than in the U.S., their image has a way to go. “They rate lowest (among asset classes) with Canadian professionals,” said Mr. Stokes.

Still, speakers were philosophical about problems.

“With close to 10,000 hedge funds now in existence, we are bound to see a few blowups and/or frauds every now and again,” said David Friedland, president of Magnum U.S. Investments Inc., and president of the Hedge Fund Association, both in Aventura, Fla., in his address to the conference. “As a percentage relative to the total number of hedge funds, historically the blowup/fraud rate has been exceptionally low.”

Another speaker concurred these kind of problems are inevitable.

“Hedge fund blowups are an unfortunate phenomenon of our industry,” said Ingrid Pierce, a senior attorney in Walkers\' Global Funds Group Corporate and International Finance Department and based in the Cayman Islands. “It seems that every year we hear about one collapse that is more spectacular than the last and the fallout leads to eye-catching headlines, calls for increased regulation and investor jitters.”

This year\'s crises are mainly about the credit crunch.

“Funds that once held relatively liquid, high-performing CDOs (collateralized debt obligations) now find themselves holding, as a result of the more general credit crunch, illiquid and underperforming assets,” said Ms. Pierce.

Whetting appetites

Despite the crunch, the desire to invest in hedge funds seems insatiable. Institutional investors are expected to pump another US$80 billion to US$90 billion into the hedge fund industry during the next 12 months, according to a study released in October by London-based Private Equity Intelligence.

To satisfy the burgeoning demand for hedge funds identified by Private Equity Intelligence, Toronto-based Quadrexx Asset Management Inc. in collaboration with Canadian Hedge Watch, unveiled at the conference a new product, Canadian Hedge Watch Index Plus, that will include only hedge funds managed by Canadian firms.

“The index\'s objective is to outperform the non-investible index measured by its Sharpe ratio. It is best for investors who are looking for an allocation to a well-diversified hedge fund portfolio with a Canadian focus,” said Miklos Nagy, chief executive officer of Quadrexx.

The new product could help satisfy a rapidly growing global demand for Canadian hedge funds.

“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,” James Niosi, then vice president of Toronto-based NBCN Prime Brokerage Services, a specialized alternative investment service offering from the Montreal-based National Bank of Canada, wrote in a news release announcing the last comprehensive study of global demand for Canadian hedge funds.

Since the study was released in January, “I see no sign that international interest in Canadian hedge funds is abating,” said Phil Schmitt, chairman of AIMA Canada, the Toronto-based Canadian chapter of the Alternative Investment Management Association Ltd. of London, and chief executive of Summerwood Group Inc. and Summerwood Capital Corp., both based in Toronto. “On the contrary, as long as global demand for the resources Canada has in such abundance remains strong, I foresee demand for our hedge funds accelerating.” 