Sprott Raising up to C$500M For Corporate Bond Fund

Aug 12 2015 | 1:21pm ET

Well-known Canadian precious metals money manager Sprott Asset Management is reportedly raising up to C$500 million for a hedge fund that focuses on corporate fixed-income securities.

The move comes as sell-side banks are increasingly abandoning their traditional market-making role in bond trading, creating opportunities for alternative managers to purchase securities at discounted prices.

These banks are adjusting to new rules that limit the ability of financial institutions to hold riskier assets and use proprietary trading desks to buy inventory used to make markets. Indeed, corporate-bond inventories held by the 22 dealers that trade with the U.S. Federal Reserve have dropped 18% since April 2013, according to Bloomberg.

The decline in bond market liquidity has been the subject of considerable concern among institutional investors for some time, as the ability to trade without triggering large swings in price becomes more difficult. 

Alternative asset managers, conversely, can fill the need for liquidity quickly and with greater flexibility, leading to an increase in hedge funds participating in the space using leveraged and spread-optimized strategies to profit from the increasing lack of middlemen between buyers and sellers. 

The fund will be managed by fixed income specialist Mark Wisniewski, who joined Sprott in May from Davis Rhea and had prior stings at Gluskin Sheff, TD Securities and Goldman Sachs.

Concurrent with his hiring, Sprott also assumed management of the Davis Rhea Enhanced Income Fund, which Wisniewski managed while at Davis Rhea. It has been renamed the Sprott Credit Enhancement Fund and forms the basis of the new hedge fund.

The vehicle will consist of two vehicles – a core portfolio of laddered short duration investment grade and high yield corporate bonds, convertible bonds, preferred shares or equities, and an overlay portfolio utilizing leverage to generate additional returns on high quality companies and reduce interest rate risk.

Toronto-based Sprott was founded in 1981 by Eric Sprott, who built a C$7.8 billion investment powerhouse largely through a focus on gold and natural resources and now boasts a wide range of mutual fund, ETF and alternative products. Fixed income makes up about C$750 million assets under management, according to Bloomberg, and the firm aims to double AUM over in the next three years as it diversifies into equity and fixed income markets.

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