Leading Canadian asset managers bet their careers on the promise of hedge funds

Date: Tuesday, May 25, 2004

From TheGlobeandMail.com - By ANDREW WILLIS-Up-and-coming executives from some of Canada's biggest financial players have bet their careers on the promise of hedge funds by establishing a new money manager called Diversified Global Asset Management or DGAM. Opened last month in Toronto, DGAM's founders all walked away from successful careers at major financial institutions for a chance to run their own shop, which will offer a fund of global hedge funds to institutional investors, such as pension plans and insurers. DGAM chief investment officer George Main built a $4.5-billion portfolio of hedge funds over 15 years at Northwater Capital Management Inc. in Toronto. Managing partner Neil Selfe was a senior investment banker at RBC Dominion Securities Inc., where he led the coverage of technology and telecom companies. Chief operating officer Jeff Lucassen was the controller of the $75.6-billion Ontario Teachers Pension Plan Board. There are also former Onex and Royal Bank professionals on the team, in roles such as risk management.

While they will face competition from global players, such as UBS, Morgan Stanley and Goldman Sachs, all homes to units selling funds, DGAM's principals see their focus and independence as competitive advantages.

"Our goal is not to be all things to all people. We have one and only one focus, to build the best hedge fund of funds business in the world," Mr. Main said. "This is a business where performance matters, not size."

DGAM plans to place money with between 25 and 30 hedge fund managers. Some will use relatively familiar strategies, such as going long and short stocks and bonds, and convertible bond arbitrage. But the company will also back managers who play in niches, such as distressed asset-backed securities and energy markets. Early indications point to a global client base, with DGAM already in negotiations with institutions from the United States and Europe, along with Canadian clients.

While there's little growth in traditional forms of money management -- conventional stock and bond portfolios -- every survey of the institutional community shows more money is being earmarked for so-called alternative investments, such as hedge funds. For example, the $32.7-billion Ontario Municipal Employees Retirement Board plans to double its alternative investments over the next five years to 35 per cent of its portfolio, in order to get the best possible returns for workers.

A study of major North American and European investors by Goldman Sachs and Russell Investment Group showed that in 2003, 22 per cent of these institutions used hedge funds, up from 16 per cent a year earlier. The amount of money flowing into the sector is staggering, as the Canadian pension fund community alone invests more than $500-billion.

Not only are more professional investors using hedge funds, they are setting aside more money for the sector. In 2001, institutions devoted just 2.5 per cent of assets to this brave new world. The Goldman/Russell survey predicts that by 2005, allocations to hedge funds will rise to 7.5 per cent of assets, while allocations to other forms of alternative assets, such as private equity and real estate, will remain steady at the 8-per-cent level.

"While utilized for some time, hedge funds are still moving from the periphery to the mainstream among most institutions," the survey concluded, adding that real estate and private equity were novel pension fund investments in the 1980s, but are now commonplace. A survey of last year's graduates from the Harvard Business School found more of the graduates headed for careers in alternative assets that any other sector.