Montreal firm freezes hedge fund

Date: Thursday, May 5, 2005
Author: KEITH DAMSELL - Globe & Mail

Norshield Financial Group shocked investors yesterday by suspending redemptions on its core hedge fund product, freezing an estimated $300-million (U.S.) in investment dollars and marking the second time in two months that a hedge fund has become embroiled in controversy.

Over the past month, the Montreal wealth asset management firm has been overwhelmed with large and small investors demanding their money back, creating a dramatic liquidity crisis for the firm, senior management said.

They said investors want their money back because poor market conditions have hurt the performance of the firm's funds, and it's long legal dispute with animation house Cinar Corp. has re-emerged in the press.

Investors who have tried to pull an estimated $100-million out of the company's $300-million Olympus Univest Ltd. fund have had their redemptions put on hold. The suspension of redemptions from the fund of hedge funds affects the many funds in the Olympus family, a series of alternative strategy mutual funds and structured notes. The Olympus group has an estimated 2,000 institutional and retail investors and is Norshield's largest and most successful product. Norshield manages about $500-million in investments.

Olympus United Funds Corp., Norshield's distribution arm, insists investment dollars are safe and asked investors to be patient. Olympus's dollars are invested with 23 different fund managers. While some futures contracts may be unwound quickly, it may take several weeks to divest long-short positions, the company said.

"The directors and senior management recognize the serious nature of this matter," Dale Smith, Olympus president, said in a conference call with financial advisers and brokers yesterday.

The liquidity crisis could not come at a worse time for the struggling hedge fund industry, observers said. Hedge fund manager Portus Alternative Asset Management Inc. was put into receivership in March amid a flurry of investigations by securities regulators from across Canada. In the aftermath of Portus, the investment community's appetite for protected notes tied to hedge fund performance has all but dried up, sources said.

"The whole industry has been hit with a black eye," said a senior executive of a Toronto hedge fund company. "I'm sure this Norshield thing won't help either."

Ironically, Norshield chairman and chief executive officer John Xanthoudakis is regarded by some as an industry vanguard.

"I have the utmost respect for him," said Peter Loach, a fund analyst at BMO Nesbitt Burns in Toronto. "This is more than unfortunate for someone, I think, who is a leader and a pioneer in the sector."

Norshield will need 60 to 90 days to fulfill redemption requests. The company is seeking input from a series of external advisers and plans to report back to investors in two weeks.

Two factors are driving Olympus's flood of redemptions. First, weak markets have meant poor returns of late for the hedge funds, and Olympus in particular. For example, the benchmark $105-million (Canadian) Olympus United Univest II Fund has returned an annual average of 4.8 per cent since its inception in 2001. But for the 12-month period ended March 31, returns sunk to a dismal 1.2 per cent. Funds across the group have been in redemption since early last year.

Then in January this year, the rate of redemptions increased dramatically when Norshield's long legal dispute with Cinar was back in the headlines. The Montreal animation company, which was hit in 2000 by a scandal over tax credits, claims it is owed millions of dollars that were managed offshore, allegedly by a company with close ties to Mr. Xanthoudakis. In response, Norshield and its CEO are seeking a total of $20-million, alleging Cinar's allegations have hurt its reputation and its business relationships. The legal fight has been followed closely in the Quebec media. Cinar has since been acquired by new owners and is privately held.