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Commodity price slide expected to nip hedge fund gains

With files from reporter Tavia Grant

Falling commodity prices trimmed gains at Canadian hedge funds in August, and when the figures are in for this month, they will likely show a continuing toll.

As shock waves continue to radiate from the spectacular meltdown last week of U.S. hedge fund Amaranth Advisors LLC, Bank of Nova Scotia said yesterday that its Scotia Capital hedge fund performance index climbed 0.86 per cent last month on an asset-weighted basis, and 0.3 per cent on an equally-weighted basis, "slightly outperforming the broader international hedge fund industry."

This compared with gains of 1.66 per cent and 1.47 per cent, respectively in July, and brought year-to-date returns for the asset-weighted index to 13.26 per cent, and that for the equal-weighted version to 10.66 per cent. By comparison, the S&P/TSX composite index gained 7.11 per cent in the eight-month period, while the U.S. Standard & Poor's 500-stock lost 1.17 per cent.

The bank said it expects continued corrections in commodity markets, and resulting pressure on the dollar will combine with slower global growth to pressure hedge fund performance.

Launched this year, the Scotia index tracks more than 40 Canadian "single" funds; it excludes funds of funds. Its members account for about $5.3-billion of the total of about $6-billion in investor capital managed by such funds.

Jim McGovern, head of Arrow Hedge Partners Inc. and founding chairman of the Canadian chapter of the Alternative Investment Management Association, expects September to pan out poorly for funds that have invested in energy and basic commodities. "Everyone with exposure to basic materials and energy is going to be down." Bigger bets in these sectors are a key reason hedge funds "have made good money over the past 24 months," he said. "But it looks like that . . . is sort of a broken trade now."

Greenwich, Conn.-based Amaranth lost about $6-billion (U.S.) of its $9-billion in capital after heavy bets on natural gas prices placed by its now-departed chief energy trader, Brian Hunter of Calgary, went against it as prices fell sharply.

Les Marton, a managing director at Scotia Capital Inc. who oversees the hedge fund index, said he expects some of its members will benefit from the falling gas prices. "Many of them have been taking short positions, so I think there will [have been] some profit-taking."

Mr. McGovern said the first question that Arrow clients have been asking in Amaranth's wake is whether the Canadian company had invested in the U.S. fund. "If you say no they're usually happy with it."

The Office of the Superintendent of Financial Institutions (OSFI), which regulates Canadian banks, life insurers and a number of pension funds, is believed to have followed normal procedures and checked with these institutions to see whether any had significant exposure to Amaranth.

OSFI spokesman Rod Giles said yesterday he could not comment on specific cases. But he said the regulator's view is that, "in general, Canadian financial institutions appear to have sufficient risk-management capabilities to manage the risks inherent in the hedge fund industry."

© 2007 The Globe and Mail. All rights reserved.

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