Salidas Multi Strategy Hedge Fund Seen Down

Date: Friday, August 1, 2008
Author: Dow Jones Newswires

Salida Capital Corp., a big Canadian hedge fund, estimates its C$161 million Multi Strategy Hedge Fund will be down about 30% this month, marking the fund's biggest one-month decline, by a significant margin, since its inception in 2004.

If there is any consolation for the fund's investors, Salida's employees are major shareholders in all of the firm's portfolios, including the Multi Strategy fund. Further, some of Salida's investors have "actually" been interested in putting more money into the firm's funds, sensing a buying opportunity, said Davd Fleck, Salida's chief executive.

Previously, the fund's steepest one-month decline was about 14% in August 2007. Salida, which manages a total of about US$821 million, blamed July's decline on the "recent vicious downturn" that has targeted the firm's core sectors and some main holdings, according to the firm's latest performance report sent to investors. In June, the fund was up 4.3%.

Citing global deleveraging, Salida notes that the speed of the sell-off is reminiscent of 1998, when markets plummeted on the Asian financial crisis, and points out that month-to-date the material and energy sectors for the Toronto Stock Exchange are each down almost 15%, with small-cap stocks dropping 30%-50%.

Crude prices are down about 12% so far this month because of concerns demand for the commodity will weaken in the face of a slowing U.S. economy and the prospect of a secular shift by drivers towards smaller cars. Other commodity prices have also been weak this month because of the U.S. economic slowdown.

Still, some of Salida's funds have held up well. For instance, its C$25 million BTR Global Macro Fund is up about 33% so far this year through July. That fund is only sold offshore but Salida plans to start selling the fund in Canada in future, Fleck said.

Indeed, Salida plans to introduce a number of new products over time to allow its investors greater leeway to adjust their risk exposure by moving between less-risky and more-risky funds, depending on overall market conditions.

Salida Known As Astute Energy Investor

Salida has been known as an astute investor in the energy sector, reflecting the professional backgrounds of portfolio manager Brad White and Chief Investment Officer Danny Guy, both of whom are former energy analysts. The performance of Salida's Multi Strategy fund reflects the woes that have hit a number of hedge funds, including Goodwood Inc. and Epic Capital Management Inc. The C$123.6 million Goodwood Fund-B was down 21% so far this year through the end of June and the C$111.1 million Epic Ltd. Partnership fund had dropped 18% over the same period, according to Globefund.

In addition, tough market conditions have also been cited by sources as reason why Waterfall Investments has been in talks to be acquired by Sentry Select Capital Corp., a much larger money-management firm. Still, the July performance of Salida's Multi Strategy fund stands out because of its stellar track record. It also shows how one bad monthly return can turn a relatively strong year-to-date gain on its head. Finally, the performance could also slow Salida's effort to woo new clients.

In April, Salida hired Fleck, formerly co-head of equities at Bank of Montreal's (BMO) BMO Capital Markets unit, as chief executive in part to raise the hedge fund's profile. He started July 7. "I probably walked into the worst market environment that I have ever seen in my career," Fleck said. But he notes that, at least on a year-to-date basis, several hedge funds are expected to be down 10-20% through the end of July because of weak, overall market conditions.

Based on the July decline, Salida estimates that the Multi Strategy fund is down 23% so far in 2008, according to the firm's performance report. By comparison, the fund was up 10% for the first six months of the year through the end of June, according to Globefund. Globefund hasn't yet published returns for July. Further, for the first six months of the year, Salida's Multi Strategy fund had sharply outperformed the group average return of 2.04% and the 5.99% gain for the S&P/TSX Total Return index, according to Globefund. The fund posted gains of 34% in 2005, 87% in 2006 and 36% in 2007.

In attempt to stem the recent losses, Salida reduced the fund's leverage but maintained its core positions, "as they have become even more attractive from a valuation perspective." The firm stressed in the performance report that the fund's July loss didn't result from a "permanent fundamental impairment" in any of the fund's holdings "due to corporate or credit events." Salida believes that the long-term price of oil should remain high, noting that supply from non-OPEC producing countries "continued to disappoint" due to the relative lack of new discoveries in politically safe jurisdictions, according to the performance report. Salida is also betting on further consolidation in the gold sector as a result of the widening valuation gap between large-cap gold stocks and their smaller-cap counterparts.

Citing Kinross Gold Corp.'s (KGC) pact to acquire Aurelian Resources Inc. (ARU.T), Salida said this deal is the first of many "that should be forthcoming and the firm's "portfolios are positioned to benefit from this trend."

Company Web Site: http://www.salidacapital.com