Abria Alternative Investments Inc. has shut the door on its flagship fund of hedge funds, blaming a spiral of redemptions that began with the implosion of Amaranth Advisors LLC last year.
The Abria Diversified Arbitrage Trust, which at its peak had assets of more than $150-million invested in various hedge funds, began its plunge after investors began demanding their money back in the wake of a loss of more than 8 per cent in September because of an investment in Amaranth.
In a bid to fund redemptions and stem further losses from Amaranth, Abria's managers sold two positions at a loss in December, leading to another monthly decline, this time 5 per cent, that fuelled demands from investors for their money back. Investors had to give 100 days notice for redemptions.
With the fund shrinking rapidly, and total assets headed toward $20-million as the redemptions piled up, it made little sense to go on, said Henry Kneis, chief executive officer of Abria.
"Clients voted with their feet," Mr. Kneis said, adding that with a small asset base the costs of running the fund became prohibitive for investors, even though Abria tried to cut back staff to rein in expenditures. "It was clear that assets were just continuing to leave. It was just getting too expensive for unitholders to bear the fixed costs of running the fund."
Funds of funds are designed to protect investors from volatility and blowups in any single hedge fund by spreading money over many funds. In fact, Abria took its name from the root word "abri," which means shelter in French and protection in Latin.
But Abria's funds never got big enough to spread their risks over a big enough group of underlying investments, Mr. Kneis said. According to an investor in the flagship fund, there were fewer than a dozen positions.
About 95 per cent of the money in the Diversified Arbitrage Trust came from individual investors, according to Mr. Kneis, with the remainder put up by institutions. Under Canadian rules, only sophisticated or relatively wealthy individual investors are allowed to put money in hedge funds. That's a small and competitive market in Canada, and the high-profile blowups at Portus Alternative Asset Management Inc. and Norshield Asset Management cast a pall over the hedge fund industry, making it harder to raise money from individual investors and get to a more sustainable size, Mr. Kneis said.
© 2007 The Globe and Mail. All rights reserved.
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