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Recent headlines not dampening investor demand for hedge funds

An estimated $2-billion flowed into alternative products last month, KEITH DAMSELL writes

You've read the hedge fund stories but you can't resist. You want a structured product and you want it now.

You are not alone.

The troubles at Portus Alternative Asset Management Inc. are but a speed bump on the superhighway of the new asset class. Total assets in Canadian hedge funds have jumped to about $16-billion, up from a slender $2.5-billion in 1999. An estimated $2-billion in investment flowed in to alternative investments, closed-end funds and linked notes last month.

A quick survey of a few alternative investment managers provides some practical advice:

Who is backing the product?

So-called principal-protected notes are the most popular and accessible structured products on the market. The note's performance will be tied to an underlying asset or fund and backed by a financial institution. You should be very, very comfortable with the track record of both the asset manager and the guarantor.

"You are potentially getting into bed with these parties for a long period of time. Will they be around when their product comes to maturity?" asked Luke Seabrook, BMO Nesbitt Burns' head of equity-linked and mutual-fund-linked products.

Take a long hard look at fees.

Costs for structured products should mirror what you pay for the underlying fund or asset the product is linked to. Hedge fund fees, meanwhile, are becoming more competitive and you shouldn't be paying more than 5 per cent off the top. Demand a breakdown of what each party is making off your investment. "There is no free lunch. If somebody gives you a guarantee, there is a fee for that. You have to pay a price one way or another," said Miklos Nagy, chairman of Canadian Hedge Watch Inc.

Know what you are buying.

Read the prospectus and make sure you understand clearly what you are getting into. Pay close attention to the volatility of the asset or underlying fund. If the asset trades at a discount historically, returns may be in doubt.

Barry Allan, president of Marret Asset Management Inc., urges investors to do the math: take your principal, minus the fees and consider the promised return. Does it all add up?

"It's like buying a mutual fund. It should be a simple process," said Steven Marshall, president of Open Sky Capital Trust Management Inc., a Montreal structured investment firm.

Whyte resigns from AIC

"A mismatch in strategies" was behind David Whyte's sudden departure from AIC Ltd., the company's former executive said.

The sales and marketing guru was brought on last summer to turn around the fortunes of the Burlington, Ont.-based fund company. Poor fund performance has seen AIC's assets under management plunge from a peak of $15.4-billion to about $10.4-billion. The private company is controlled by president and chief executive officer Michael Lee-Chin.

Mr. Whyte surprised the industry when he resigned his post at AIC, effective March 16, less than a year into his mandate. In an interview, Mr. Whyte was tight-lipped about specifics but was quick to dispel suggestions that he and the billionaire boss did not get along.

"There was a clear difference in direction. Mike had his way of doing things and I had mine," Mr. Whyte said.

He will not be idle for long. The phone has been ringing and an appointment notice from a Toronto fund company may be coming soon.


The lights are on at the Investment Funds Institute of Canada but there's nobody home.

There have been two major stories in recent weeks with deep implications for the mutual fund industry. February 23 saw Finance Minister Ralph Goodale kill foreign content limits in registered retirement savings plans. Then last Thursday, the Ontario Securities Commission released its final report on its sweeping investigation of fund trading practices.

The timing of the two events were known well in advance. IFIC, in fact, had petitioned Ottawa on Feb. 7 to address the issue of a national regulator in its upcoming budget.

But when the news happened, the senior team at IFIC were unavailable. February found president and CEO Tom Hockin on vacation. Last week, Mr. Hockin and his team were attending an industry conference in sunny California. Ralf Hensel, IFIC's senior legal counsel, hopped on an early flight back to Toronto just in time to take media calls.

Not an impressive showing by one of the country's most powerful and influential lobby groups.

CIFSC burning the midnight oil

It looks like a busy spring for the Canadian Investment Funds Standards Committee.

The group of representatives of mutual fund research firms defines and classifies funds. The end of the foreign content cap held in registered retirement savings plans and the addition of income trusts to the S&P/TSX composite index will mean some long hours ahead.

The committee is asking the fund industry for input on a series of questions: Does it make sense to have a foreign content cap in a Canadian equity fund? What should the limit be? Should new categories be set up for funds that hold income trusts and those that do not?

The process is expected to take many months and the outcome is important. CIFSC's standards set the ground rules for how fund managers compete. It's worth noting that there's no stipend or salary for the CIFSC's committee members. The group of 15 are volunteers from Morningstar Canada, Rodgers Investment Consulting and other firms. In contrast, a director at one of Canada's 100 largest public companies receives an estimated $73,000 annually.

© 2007 The Globe and Mail. All rights reserved.

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