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Hedge fund managers optimistic despite gloomy summer

Date: Friday, September 26, 2008
Author: Jonathan Ratner, Financial Post

The Canadian hedge fund industry has ballooned in the past few years, with some estimating annual growth at 30%. But there is still plenty of room for more, given that plenty of the strategies, such as risk arbitrage, that have proliferated in London and New York have not yet arrived here.

A near full house at yesterday's Canadian Hedge Fund Managers Speak With Investors forum demonstrated that the industry, now pegged at about 200 separate funds in Canada, is alive and well regardless of the recent turmoil. Much of this is being driven by institutional investment.

Despite so much volatility in the markets in the past two months, and the fact that some feel fundamentals have "gone out the window," Canadian hedge fund managers at the forum, owing perhaps to having less leverage than their U. S. counterparts, remain upbeat. "The response from investors was outstanding. They are looking for some understanding and this is a perfect venue for that," said Karen Azlen, CEO of Introduction Capital, who organized the event.

With August returns for many Canadian funds in the -20% range, and even worse results expected for some in September, unstable markets are clearly causing pain. As a result, hedge funds are facing the prospect of investor redemptions as the end of the quarter quickly approaches.

One manager said he hopes the U. S. bailout plan is approved by Congress quickly, as it could produce a much-needed end-of-quarter rally.

Like other investors, hedge funds are coping with challenging dynamics, such as rising prices for lousy companies, as managers are forced to unwind their short positions. At the same time, redemptions are forcing some managers to sell companies they like.

But forum attendees expressed hope that some sort of normalcy will return, bringing with it a sense of opportunity. Yet the rules have clearly changed, and regulation for the hedge fund industry seems inevitable. One manager in attendance suggested that new short-selling rules could become permanant, as regulators target hedge funds with "a new Sarbanes Oxley."

Other issues addressed at the event included investors seeking more portfolio transparency and the risks associated with preferential transparency for clients with higher investment levels. There is also an emerging trend toward regular monthly conference calls, where clients get updates and can ask fund managers questions.

While 70% of Canadian hedge funds have a long-short strategy, new fund launches have shown some divergence from this. But a limited number of strategies demonstrates what another manager labeled the "relative immaturity" of the Canadian industry, which, participants at the forum said, makes it an even more interesting time to be be involved.