Northern Neighbor Sees White Hot Growth In Hedge Funds

Feb 24 2006 | 12:00am ET

By Deirdre Brennan 

The Canadian hedge fund industry has taken a few knocks over the past year with various scandals, most notably the collapse of Portus Alternative Asset Management and the sudden disappearance of its manager, Boaz Manor, who fled to Israel. But behind the splashy headlines lies another hedge fund story, one of a small but steadily growing industry.

According to Investor Economics, the Canadian hedge fund sector has increased six fold in the last five years and constitutes the fastest growing segment of the country’s financial industry. Scotia Capital has taken note of this developing financial sector in Canada and is rolling out the first-ever Canadian hedge fund index on March 1. The index is currently tracking 31 hedge funds with an estimated CAD$3.5 billion (US$3.04 billion) in assets under management.

“The scale and size of the industry warrants an index tracker,” said Patrick Blessing, associate director of global equity finance sales for Scotia. “The Canadian hedge fund industry has been a few years behind the U.S. hedge fund industry, and finally we are starting to see some significant assets being raised both from domestic investors, and particularly from international investors.”

James McGovern, managing director and chief executive of Arrow Hedge Partners and chairman of the Canadian branch of the Alternative Investment Management Association, estimates that the single manager market in Canada, including both onshore and offshore funds, is between CAD$4-6 billion, “most likely closer to the CAD$6 billion mark,” he said. He estimates that assets under management in the fund-of-hedge funds industry are between CAD$3-4 billion.

“Our securities market here isn’t as deep as in the U.S. where you have a wider swath of strategies,” said McGovern, explaining that most of the hedge funds in Canada are opportunistic, long/short funds. “But the big issue here is that there is a lot of undercapitalized talent.”

Both McGovern and Blessing said European investors are particularly interested in Canada, though neither are quite sure why. “Perhaps the hedge funds have spent more time marketing in Europe,” said Blessing. “Canada is a more interesting story overseas than it seems to be in New York.”

Jean-Pierre Langevin, portfolio manager of Canadian hedge fund firm Crystalline Management, which has been running an arbitrage fund since 1998, has watched the financial marketplace develop over the years and has also noticed increasing interest from European investors.

“Over the last 20-30 years we have faced periods of capital inflows as well as outflows from foreigners, but rarely have the Europeans been so active in investing in Canada in the long term,” Langevin said. As for U.S. interest in Canada, Langevin chuckled, “we have been close neighbors, and when one is 15 times smaller it tends to be ignored.” He added on a more serious note, “but I think that there is momentum building in the states.”

Langevin believes investors are being drawn to Canada partly because of the country’s tremendous natural resources, which include metals, gas, minerals, gold and silver. Blessing agrees that commodities and natural resources are of interest to foreigners, but adds that, although these may be what initially attract investors, once they enter the marketplace they realize that there is more depth to it.

“Commodities resources have piqued investors’ interest,” said Blessing. “The cyclical element of Canada gets them interested, and once they have spent some time seeing some of the managers and reviewing some of the funds here they realize that there is some impressive hedge fund talent irrespective of commodities, so we have been seeing some impressive growth in the industry overall.”

Blessing added that it is difficult to say how much new money has flown into single strategy hedge funds in recent years, but said the new index was up 16% in 2005, “so I think that there is significant asset growth, at least from performance.”

Meanwhile, Langevin is capitalizing on growth in the industry with his current fund, and is also readying to launch a new, higher-volatility version of the fund later this year. The new fund will target both domestic and international investors. 

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