OTTAWA — In Canadian
hedge fund circles, it helps to have a thick skin.
“The hedge funds are a bunch of scum who make deals fast and force companies into taking short-term decisions whether they are in the best interests of shareholders or not,” Stephen Jarislowsky, president and chief executive of Montreal-based Jarislowsky Fraser Ltd., said in an interview that appeared May 23 in the Financial Post, the business section of the National Post newspaper, which is published in Toronto.
Jarislowsky Fraser manages funds on behalf of governments, corporations, unions, universities and other institutions, and has more than $58.7 billion (U.S.) in assets under management.
“Mr. Jarislowsky is entitled to his opinion,” said Phil Schmitt, chairman of AIMA Canada, the Toronto-based Canadian chapter of the Alternative Investment Management Association Ltd. of London, and chief executive of Summerwood Group Inc. and Summerwood Capital Corp., both based in Toronto. “But activist investing is not only practiced by
hedge fund managers but also by pension fund managers — and by Jarislowsky himself from time to time.”
In addition to receiving criticism from outsiders, Canadian hedge funds are under attack by their own leaders. Eric Sprott, president and chief executive of Toronto-based Sprott Asset Management Inc., told the Standing Senate Committee on Banking, Trade and Commerce in its April 25 hearing that a current surplus of investible cash among hedge funds has led to a lending mania.
As well as improving oversight of the industry, he recommended to the committee that a select list of auditors be drawn up and that hedge funds be required to choose auditors from that list.
Compounding the Canadian
hedge fund industry’s public-
relations woes was the recent dredging up of an old scandal, the $725 million collapse of Toronto-based Portus Alternative Asset Management Inc. in 2005 (Investment News, Feb. 28, 2005).
According to investigators from the
hedge fund’s trustee, New York-based KPMG LLP, which is affiliated with KPMG International, a global cooperative, Portus co-founder Boaz Manor’s evidence over the course of four days of examinations was found to “be not credible,” according to a report posted on KPMG’s website. “His explanations for many events were confusing, convoluted, imprecise and unsupported.”
“I concur [with that assessment],” Ontario Superior Court Judge Colin Campbell said during a May 17 hearing in Toronto, according to Bloomberg News.
Global applause
Against the din of domestic criticism and the unanswered questions about Portus comes the sound of applause from abroad.
“The global commodity boom, Canada’s exposure to resources, significant mergers and acquisitions, and the strong Canadian dollar have catapulted Canada onto the global investment radar screen, generating significant interest in Canadian hedge funds globally,” James Niosi, vice president of Toronto-based NBCN Prime Brokerage Services, a specialized alternative investment service offering from the Montreal-based National Bank of Canada, wrote in a January news release announcing a study of Canadian hedge funds.
The study found that 11% of global hedge fund assets came from banks and insurance companies, but Canadian hedge funds relied on partners and employees for 25% of their funding, a group which represented only 8% of global hedge fund allocations.
According to the study, 77% of Canadian hedge fund managers said they were looking to raise additional capital over the next 12 months. Forty percent of Canadian hedge fund managers said they were active in Western Europe, 20% in Japan, 15% in Asia (excluding Japan) and 15% in Central Europe.
On April 19, NBCN, and Innocap Investment Management Inc., both subsidiaries of National Bank of Canada, announced the launch of their European-based managed account platform for alternative investment managers.
That joint venture is only one sign that the Canadian hedge fund industry has the ability to morph its way into intriguing new situations.
Another was the announcement May 22 that Scotiabank and Arrow Hedge Partners Inc., both of Toronto, were launching The Bank of Nova Scotia Arrow Multi-Strategy Fund Deposit Notes, Series 1.
Using an Arrow multistrategy hedge fund to underpin the Bank of Nova Scotia principal-protected note “is consistent with the strategy of providing investors with exposure to potential growth, driven by the pursuit of absolute performance, while protecting them from downside risk,” said Jim McGovern, CEO of Arrow Hedge Partners, “because that’s exactly the way the fund is managed.”
For its part, “Summerwood is working on the final stages of a carbon trading fund,” said Mr. Schmitt. “We are at the point of evaluating potential transactions and speaking to both producers and expected purchasers of domestic carbon credits, and we anticipate having more to announce over the next three months.”
