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BluMont Discusses Redemptions

Date: Tuesday, February 7, 2006
Author: Hedgefund.net daily report

When Toronto-based hedge fund BluMont Strategic Partners reported a gain of 19.21% over the past 12 months, investors responded by redeeming nearly 2 million units, reducing its assets by CAN$22.9 million ($19.9 million).

According to Stephen Kangas, president of BluMont Capital, the redemptions could have come for a couple of reasons. The fund trades on the Toronto Stock Exchange, and like most closed-end funds, generally trades at a discount. Once a year, the fund company must offer redemptions at market value, which can attract arbitrageurs.

But Kangas said the fund is not very large for a listed security, so a more likely explanation is that retail advisers encouraged their clients to cash in after a good year.

"They made their commission on the first sale, and there's no more money being made for them," Kangas said of advisers, suggesting they were steering clients to the next hot new opportunity, such as Canadian oil stocks.

Canada is currently in a bull market, with energy stocks making up more than 30% of the major indexes. BluMont's multi-manager fund, which is run by chief investment officer Veronika Hirsch, underperformed index funds last year, despite its own double-digit growth.

"In a bull market, naturally hedge fund managers tend to lag," said Kangas. "Everyone thinks oil's going to whatever, kind of like the dot.com era. What do I need a hedge for?"

Kangas said while investors might not see a reason for a hedge at present, they will see the advantage of downside protection later, when markets shift.

BluMont also works with Man Investments in marketing and distributing co-branded hedge fund products in Canada. The Man portfolios last year outperformed conventional global equity and U.S. equity funds, Kangas said.

Some Canadian hedge funds are also experiencing fallout from Portus Alternative Asset Management, the shady Toronto-based firm shut down last year by the Ontario Securities Commission. Investors still are unsure how much of their money they will get back.

Kangas said there has been a tightening of due diligence by advisers. Financial services firms have now agreed to return to investors more than CAN$12 million in fees they received for referring clients to Portus.

"This maybe put the fear of God more than necessary into the asset class," said Kangas.

The new mantra in Canada is that simpler is better. Investors want more transparency in fees and investment structures. Principal protected notes, which were used by Portus and have become a common investment vehicle in Canada in recent years, are receiving particular scrutiny.

BluMont Strategic Partners uses a Canadian long-short equities strategy, which investors see as simpler and more reliable than other strategies. Kangas said Canadian long-short funds have been largely unaffected by the Portus scandal. The Man products might seem a bit more daunting, he said, but the reliability of the Man name helps reassure investors.

With the annual redemptions behind them, BluMont is looking into other options. Already, the multi-manager fund dropped its lowest performing manager, and the firm is investigating how the fund might trade at a more efficient level.

Kangas said BluMont is considering another issue or rights offering, or perhaps doing something completely different - buying up the old fund and establishing a new one.