AIMA's new chair to focus on lessons of '08

The last year was a brutal one for the alternative investment fund industry, but with the worst seemingly behind the new head of Alternative Investment Management Association of Canada (AIMA) hopes the lessons learned from the downturn will ultimately strengthen the industry.

Gary Ostoich has been named the new chair of AIMA. He succeeds Phil Schmitt who is stepping down after serving as chair for the past three years. Ostoich, a lawyer by training, is president of Spartan Fund Management, which manages a multi-strategy hedge fund based in Toronto.

He has been a prominent figure in the Canadian hedge fund industry for many years, having become involved as a lawyer in the early 1990's when the Canadian alternatives market was in its infancy. He was also one of the founding members of AIMA.

Hedge funds are doing well right now. Many of the top fund mandates in the country in performance are alternative investments. Ostoich is hoping that the Canadian alternative investment space can build on the culture of transparency and investor education, which came to forefront during the downturn.

"Jim McGovern and I started AIMA back in 2003. I served on the executive for a number of years as legal counsel. In the last few years, I stepped back to let some other people get experience at the executive level," says Ostoich. "It was just a natural when I heard Phil's term was coming up that I should rejoin the executive at the chair level, where I feel I can contribute and give back to the industry. It's certainly an interesting time for the industry. It's fascinating, both what happened in 2008 and how quickly things are turning around in 2009. There are a lot of lessons to be learned from 2008. A lot of important things are occurring on the regulatory side and within the industry itself amongst the managers that have survived."

Ostoich is a natural fit for developments on the regulatory side. He has worked with various securities regulators across Canada with respect to the alternatives industry, including testifying before the Senate Banking Committee on hedge fund regulation.

He expects regulation to become tougher for hedge funds both domestically and internationally — and he doesn't view this as a negative development.

"I'm going to continue to work with regulators as I have in the past. There are likely to be some [tougher requirements] on the registration side. I don't view these as hurdles as a reality of managing money and I think what that will do is probably set the bar higher for people to enter the industry and stay in the industry," he says. "Outside of Canada, there are definitely going to be challenges for Canadian funds to offer their funds for non-Canadians, such as Europeans. Right now there is some draft paper suggesting the bar is going to be raised entry. AIMA is aware of these regulatory developments globally and has been in front to ensure there is a level playing field."

Keeping international markets open to Canadian managers is crucial, Ostoich says, because the Canadian hedge fund industry has a number of unique differentiators from other markets. Most notably it has some of the deepest resource sector investment talent in the world.

"There is expertise on the resource side that is second to none, globally. That sector exposure in Canada, that is difficult to replicate in other global jurisdictions," he says. "There aren't as many huge players exploiting the Canadian hedge fund space. It's not big enough to support 20 multi-strategy hedge funds out of Connecticut. There are different strategies available in Canada that wouldn't necessarily be available in the marketplaces."

He adds, "Finally there are some really good portfolio managers and traders in Canada that are just as good as elsewhere. The fact it's Canada, not New York and London, it sometimes gets missed."

Unlike New York, Ostoich says Canada actually has much stronger regulation for hedge funds, which are required to register with provincial securities commissions and can therefore be monitored and audited. No such rule currently exists in the United States, meaning there are more opportunities for outright fraud with U.S.-based funds.

Rehabilitating the image of hedge funds for Canadian advisors and their clients will also be a key goal of Ostoich's tenure. He believes education is an important feature of this. For example, investors need to understand that hedge fund is a catch-all phrase for alternative investment funds, which range drastically in both strategy and quality.

"If there is one lesson to come out of 2008 that investors should remember, it is to understand the term 'hedge fund' can be used by anybody," he says. "Once you get through that, investors can look to people who are involved in some sort of true hedging or involved in strategies that provide [unique] investment correlations and there some benefits to some benefit to portfolios."

In the past, Ostoich says many investors were to eager to chase performance, rather than focus on strategies that benefit their portfolio.

"Investors have a bunch of funds to choose from and they tend to select which one is up the most on the year. I think that in the past, everybody would load into that strategy if a fund is up, 50, 80 or 100%. There is probably a good chance the same fund can down 50% or more," he says. "I think the big starting point [in education] is let's get clear on nomenclature. Anybody can use the word the hedge. I think we need to get that point across to advisors — put aside the word hedge and look at the fund's strategy is.

(09/09/09)