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Investors' money is safe, Portus says

Hedge fund firm seeks to reassure clients a day after it freezes accounts

With files from Report on Business Television reporter Andy Hoffman

Portus Alternative Asset Management Inc. sought to reassure nervous customers yesterday that their money is safe, just one day after the hedge fund operator froze its investment accounts and suspended any withdrawals.

Provincial securities regulators across the country are investigating Portus, and last week they issued a temporary order preventing the firm from opening up any new accounts or accepting additional cash for its funds.

In a statement late yesterday, Portus dismissed suggestions that some of its so-called principal-protected funds are not guaranteed by a bank, and promised investors would receive all of their principal if they remain in the funds until maturity. "This bank note is issued and 100 per cent backed by one of the world's major financial institutions," the firm stated. "Naturally, investors are encouraged not to withdraw funds."

The name of the bank was not disclosed, but it is believed to be Société Générale (Canada), a subsidiary of the French banking giant. SocGen has confirmed that it has a relationship with Portus, but declined to elaborate.

Regulators in Prince Edward Island alleged in a notice last week that Portus has created the impression "through direct and indirect misrepresentation" that clients are purchasing funds guaranteed by a bank. No client portfolios were structured to contain such a guarantee, the regulator alleged.

Portus sent a separate letter to its network of advisers, saying that while investors cannot currently cash out their positions, all of the funds' assets -- estimated to be over $800-million -- are safely deposited in accounts with a major Canadian bank. RBC Dominion Securities Inc. has been listed on Portus documents as a custodian of one of the firm's trusts, but sources for the bank-owned brokerage said it holds only about $16-million in Portus assets.

Staff from the Ontario Securities Commission have been at Portus's offices for the past two weeks as part of the regulatory probe, and OSC officials met yesterday with Boaz Manor and Michael Mendelson, the hedge fund's co-founders, according to one of Portus's client service representatives. Portus told its advisers it is continuing to talk with the OSC and other provincial securities regulators and is "satisfied that significant progress is being made toward a successful resolution."

Val Cesselli, chief operating officer at Portus, declined to discuss the matter.

David Scrivens, an investment agent at the Scrivens Family of Companies in Ottawa, said the regulatory scrutiny surrounding Portus is "certainly a concern," and said the barrage of news media coverage has made customers nervous.

Investors tried to sell $8-million worth of Portus's $20-million Market Neutral Preservation Fund before the firm froze redemptions on Tuesday.

"We're looking for facts before we comment," said Mr. Scrivens, whose brokerage firm includes licensed agents for Manulife Securities International Ltd. The unit of Manulife Financial Corp. has referred more than $200-million worth of client investment to Portus.

"We've been on some e-mails and conference calls with [Manulife], and they're saying . . . they've done their due diligence on each series that Portus has been offering," Mr. Scrivens added.

A spokesman for Manulife said the company is monitoring the situation "extremely closely," and reiterated that it conducted due diligence on the Portus funds before it agreed to the referral arrangement in 2003. Several other brokerages, including BMO Nesbitt Burns Inc. and National Bank Financial Inc. said the Portus products did not meet their due diligence criteria.

Portus markets what is known as hedge fund "funds of funds," a product that invests a pool of money with several different hedge fund managers. As part of its arrangement with Société Générale, Portus must select its hedge fund experts from a roster of 80 professionals that the bank endorses through its Lyxor Asset Management unit.

Portus, a relative upstart in the Canadian hedge fund industry, has taken many by surprise with its rapid growth. Regulators claim it is taking in roughly $20-million in new assets each week, making it one of the country's fastest-growing hedge funds.

Hedge funds that include a principal guarantee are growing in popularity among ordinary retail investors. Under securities rules, hedge funds with a guarantee can be marketed to all investors rather than just those deemed to be sophisticated or accredited, because they are backed by a major financial institution.

Guaranteed hedge funds are typically marketed as follows: An investor buys a note that is issued by a major bank or other financial institution and the hedge fund marketing the product acts as the middleman. The guarantee is, in effect, a debt obligation of the bank, which agrees to repay the entire principal invested in a note at the time it matures. The investment is much like a guaranteed investment certificate but it also offers an investor the opportunity to make additional returns through managed hedge fund investments, one industry executive explained.

Investors who purchase such notes receive a document called an information statement directly from the bank, spelling out its terms and conditions, executives said. The bank providing the guarantee also independently reviews a fund's investment portfolio.

However, executives at rival firms said they have never seen hedge funds structured like those managed by Portus. With Portus, no financial institution is named in one of its offering memorandums -- a point industry participants described as very unusual.

Portus Q&A

Toronto-based Portus Alternative Asset Management, which says its "core purpose is to protect your life savings, the foundation of your lifestyle and aspirations," has 26,000 clients and $800-million under management.

Who runs the company?

The CEO is Michael Mendelson, a University of Texas graduate who also founded Southview Capital Corp. Managing director Boaz Manor is a graduate of the University of Toronto.

What does Portus sell?

BancNote Trust and BancLife Trust, so-called hedge fund "funds of funds," which each offer a guaranteed return, 100% principal protection and liquidity.

How are these products sold?

Individual investors were referred by their financial advisers to Portus, which processed its sales directly. The firm uses offering memorandums, not prospectuses.

What does the find print say?

"There can be no guarantee against losses resulting from investment in units...units are not guaranteed by any bank, "says a Portus offering memorandum.

What are the regulators doing?

Regulators in Ontario, Nova Scotia and New Brunswick have imposed a temporary ban on the firm and are investigating a range of compliance issues as well as its marketing practices and record keeping.

© 2007 The Globe and Mail. All rights reserved.

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