Salida caught up in Lehman meltdown

Date: Thursday, October 2, 2008
Author: Andrew Willis, Globe and Mail

Salida Capital has become a poster child for problems plaguing hedge funds.

A $1.1-billion fund manager that just couldn't miss over the past seven years has been hit by series of problems, most shared by the rest of the industry. Salida announced Wednesday that assets of three of their offshore funds (which represents a third of overall assets under management) are frozen at Lehman Brothers, co-president David Fleck has departed, and investors took double-digit losses in last month's volatile markets.

Salida joins a list of dozens of funds that are caught up in the failure of Lehman's prime brokerage unit, an arm of the investment bank that caters to hedge funds. The Toronto-based fund, which caters to wealthy families, has assets in three offshore funds frozen at Lehman. Redemptions are suspended on these funds until the situation is resolved. Salida's other five funds (including the flagship Canadian Salida Multi Strategy Hedge Fund) and managed accounts are not affected by Lehman's problems.

While the combination of Lehman issues and poor performance have a number of U.S. hedge funds announcing they are closing their doors, Salida executives said they are very well capitalized and are open for business, and for the most part, clients are keeping faith.

“We're down, but we're not out,” said Salida co-president Gary Ostoich.

However, the firm is pulling back on expansion plans outside of Canada put in place in July, when former BMO Capital Markets head of equities David Fleck joined the fund as co-president. His arrival was part of a strategy to expand Salida's client base outside Canada, and those plans are now on hold. Mr. Fleck decided to leave Tuesday, in what both sides describe as an amicable parting.

However, Salida is still going forward with launching a series of products in Canada including the launch of the Salida Global Macro Hedge Fund this month.

Like a number of hedge funds with a commodity focus, Salida had poor performance in September. Mr. Ostoich said its funds were down by between 11 per cent and 24 per cent.

“My mindset  has always been to be humble in prosperity, and strong in the face of adversity,” said Mr. Ostoich, a top lawyer and domestic hedge fund pioneer who joined the fund manager four years ago. “So when adversity hits us, we owe it to our investors to keep them informed and take appropriate action against Lehman to retrieve assets that rightfully belong to the funds and ultimately to our investors”.

Salida was founded in 2001, and enjoyed a terrific run over the past seven years, with five of its six fund offerings averaged 20-per-cent-plus annual performance since inception. The Canadian Salida Multi Strategy Hedge Fund has annualized returns in excess of 24% even after taking September's negative performance into account.  The fund manager has nine investment professionals and a total of 22 employees.

Data from U.S. money managers shows hedge funds fell an average of 5.3 per cent for the month through to Sept. 26, according to the numbers that Bloomberg culled from the Global Hedge Fund Index compiled by Hedge Fund Research in Chicago. The index has dropped 10 per cent for the year.

For Canadian funds, the most recent data comes from the end of August, when the Scotia Capital Hedge Fund performance index was down 2.99 per cent for the month and 1.76 per cent year-to-date. Salida's funds are part of the Scotia Capital index.

Lehman had clients from across the hedge fund spectrum. Some of the industry's biggest names, such as Harbinger Capital, have seen their assets frozen. Bloomberg reported Wednesday that Darden Capital Management, an investment club run by students of the University of Virginia's business school, has about $6 million in four funds that are stranded at Lehman.

A number of funds requested their assets be taken out of Lehman in the days prior to the investment bank's failure, but got stuck in the dealers demise when the paperwork did not get processed in time.

Bloomberg also said Wednesday that PricewaterhouseCoopers, Lehman's bankruptcy administrator in the U.K., where its European prime brokerage was based, doesn't know how much money is at stake. PwC said last month it's trying to recoup about $8 billion in cash that Lehman's parent company allegedly withdrew from its European unit before the collapse. It will take weeks, if not longer, to sort out the mess, according to PwC.