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Fund manager's convictions dictate strategy

Date: Tuesday, March 28, 2006
Author: KEITH DAMSELL- globeandmail.com

Eric Sprott likes to hedge his bets.

It may come as a surprise to some but Mr. Sprott, one of Canada's top performing mutual fund managers, is arguably this country's best hedge fund manager too.

Sprott Asset Management Inc. oversees about $1.2-billion in retail hedge funds. That's in addition to the more than $2-billion the Toronto firm manages in retail mutual funds, including the top-ranked Sprott Canadian Equity Fund. The firm's three long-short hedge funds "are almost like a market proxy," Mr. Sprott said. "It's pretty easy for us to slip from thinking just long-only to being hedged."

The manager correctly called a secular bear market at the height of the tech bubble and in 2000, the Sprott Hedge Fund L.P. was launched as a means to "protect people in a bad stock market," the fund manager said. The long-short fund has posted an impressive 31.5-per-cent average annual return net of fees since inception. Two additional hedge funds followed in 2002 and 2004.

Sprott "is definitely a Canadian hedge fund success story," said Patrick Blessing, head of sales for global equity finance at Scotia Capital Inc., a unit of Bank of Nova Scotia. Strong performance and an ability to communicate the firm's sometimes unconventional views to investors have driven success, he said. (Scotia Capital is the prime broker for the Sprott Opportunities Hedge Fund LP.) Strong equity markets have weakened returns in recent years but Mr. Sprott is sticking with his thesis of fear and survival driving equity markets, a view that he applies to mutual and hedge fund investing. He believes the world is slowly running out of crude oil and a bull market for precious metals is in the early stages of a 20-year cycle. Sprott funds have made the most of uranium and gold stocks and his hedge funds are shorting a number of U.S. large-cap stocks.

Mr. Sprott's strong convictions lend themselves to hedge fund investing, industry marketing consultant Dan Richards said. "He makes a concentrated bet. . . . He doesn't tip-toe in to his holdings."

For Mr. Sprott, it all comes down to common sense. Hedge funds have "some pretty conservative biases. . . . I think it really works better in a bear market than a bull market," he said. "It depends on what you think is going to happen. If you are a bit bearish, I think owning a hedge fund is the best thing to do."