Hedge funds centre stage

Date: Wednesday, February 15, 2006
Author: TAVIA GRANT- Globe & Mail

On March 1, about 75 European pension plan chiefs, private bankers and other institutional investors will gather in the Park Hyatt hotel in Zurich, Switzerland, to hear about a new investing opportunity: Canadian hedge funds.

In response to a swell of global interest, Scotia Capital Inc., host of the event, will also unveil a measure that tracks -- to some degree -- how Canadian hedge funds are performing.

The attraction? Canadian managers are experts in the white-hot world of commodities and there's less saturation in Canada than in the wildly popular U.S. or European hedge fund markets. The market here, by contrast, has existed beneath the radar.

Until now, the Canadian industry has remained a mystery to most, with little known about the exact size of hedge fund holdings or how they've performed. What is known is that they're higher risk, sometimes higher return, lightly regulated and on occasion, prone to spectacular collapses.

They're also the fastest-growing segment of the Canadian financial market. In the past five years, assets under management in the Canadian hedge fund industry have jumped more than sixfold, according to Investor Economics.

Scotia Capital pegs the current assets of Canadian-based hedge fund managers, excluding funds of funds, at about $6-billion. And it isn't the only one seeing a surge in interest from abroad.

"It's building every day," said James McGovern, chairman of AIMA Canada, the Canadian hedge fund industry's trade association. "In fact, there's more interest for Canadian managers internationally than there is locally."

Internationally, hedge funds have swelled to a $1.1-trillion (U.S.)-a-year industry, with many predicting more growth ahead as pension funds and wealthy individuals diversify their holdings and try to juice returns.

Some of that money is bound to trickle into Canadian hedge funds, said Scotia Capital's Les Marton, a managing director who's looked at the hedge fund industry for more than a decade.

His Toronto-based team has created the Canadian hedge fund performance index, currently comprising 29 funds with about $3-billion (Canadian) in assets. To qualify for the index, funds must have a track record of at least 12 months, be run by a Canadian-based manager and have a minimum of $15-million under management.

The results? Investors would have fared better sticking with plain vanilla, index-linked funds, at least in 2005.

Last year, the hedge fund index rose 16.2 per cent on an equally weighted basis -- lagging the 21.9-per-cent gain of the S&P/TSX composite index. The reason, according to Mr. Marton: Most funds are both long and short equities, meaning they may be protected from a downturn in the market, but didn't fully benefit from the upside. They did, however, fare much better in Canada than in the United States, where the CSFB/Tremont hedge fund index rose 7.6 per cent last year.

Colin Bugler, managing director and co-head of global equity finance at Scotia Capital, says until now, most international investors' interest in hedge funds has been focused on the United States. That's changing.

"The amount Canada is in the news (from the commodity cycle to the high amount of corporate activity), the growing international understanding of income and royalty trusts and the ever-elusive search for alpha [outperformance] is fuelling this interest," he said.

Moreover, interest in U.S. funds may ebb after a barrage of recent press reports about how fees have risen even as performance slowed. In Canada, fees have remained fairly steady.

While Scotia Capital's index offers a good start in tracking what has been an opaque industry, it only provides performance on an aggregate level. Anyone seeking the stars and dogs within the index will have to do their own due diligence.

Scotia Capital plans to roll out subindexes, which will be grouped according to investment styles, in the next year and may eventually offer an index-linked fund that can be traded. The index will officially be rolled out March 1, listing performances from January, 2005, to January, 2006.


Zurich bound

In response to growing global interest, Scotia Capital Inc. will unveil in Zurich a measure that tracks - to some degree - the performance of the Canadian hedge fund industry as overseas investors clamour for greater exposure and expertise in commodity-related markets.


Tale of the tape

ValueReturn mth/mthReturn yr-to-dateAnnualized return*
SC index asset weighted$1,152.20+3.79%+15.22%+15.22%
SC index equal weighted1,161.52+3.39+16.15+16.15
S&P/TSX composite index1,219.06+4.14+21.91+24.48
S&P 500 composite index1,030.01-0.10+3.00+3.00
30-day Cdn. T-bills1,025.82+0.28+2.58+2.58
SC domestic bond universe1,064.62+0.75+6.46+6.46

*since inception of index (Dec. 31, 2004)