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Mutual Fund News

$83-million just another ho-hum year for hedge fund manager

awillis@globeandmail.com

Maybe folks were just jaded by news earlier this week that a previously obscure hedge fund manager named John Paulson banked $3-billion last year, but revelation yesterday that local hedge fund kingpin Eric Sprott earned $83-million over the past 12 months was greeted in this office with shrugs.

Mr. Sprott's compensation is public as part of the prospectus for Sprott Asset Management, which formally filed the paperwork for its planned IPO. The fund manager is expected to garner a $1.3-billion to $1.5-billion valuation when it lists on the TSX in a few weeks.

The prospectus shows why hedge funds are the place to be these days. In addition to eye-popping compensation, the sector is growing like wildfire. Institutional and individual fascination with these alternative asset plays mean the total amount of assets in the still-young Canadian hedge fund sector is growing at a 55-per-cent annual clip.

In contrast, traditional mutual funds are expanding assets at a more sedate (though still respectable) 12-per-cent annual pace, while traditional institutional managers are growing by just 10 per cent.

As much as investors like to go all intellectual and say they buy hedge funds to diversify away from public markets, the appeal of this asset class remains turbo-charged performance. And Sprott Asset delivered that in spades, with its benchmark Canadian equity fund up 28 per cent annually over 10 years. Sprott Asset employees have been eating their own cooking: They've invested $276-million of their money in these funds.

The striking element of Sprott Asset's story is this business grew to $6.9-billion of assets and $49-million of annual profit without really advertising its story. Marketing was word-of-mouth. Only after the IPO will Sprott Asset gear up by hiring wholesalers and all the other sales staff who form the core of most successful money managers.

Underwriters can, and no doubt will, argue that this company's best days are in front of it, a critical element to any growth stock pitch. Cormark Securities, Mr. Sprott's alma mater, and TD Securities are leading the transaction, at the head of a cast of 12 dealers.

On the back of solid asset growth and dynamite performance, Sprott Asset was able to pay its people well. Mr. Sprott, with a 78-per-cent stake in the firm, took an $80,461 salary last year. He earned an additional $16-million in a cash bonus, and took a further $67.7-million bonus that reflected a move to take $87-million of excess capital out of the firm, ahead of the IPO.

While these are impressive numbers, for those who missed it, Mr. Paulson set a Wall Street record for compensation by taking home $3-billion (U.S.) after making a huge bet against the U.S. mortgage market at his Advantage Plus hedge fund, according to a study released Monday in magazine Trader Monthly.

Going forward, Mr. Sprott and his colleagues will work on a new compensation scheme, with a less generous bonus plan that sees employees eligible for 25 per cent of the annual operating profit, and 25 per cent of the fund manager's performance fees.

a fine collection

One of the highpoints of any visit to Sprott Asset Management is a quick tour of the 63-year-old founder's art. Eric Sprott has a fabulous eye and works on display include stunning Inuit pieces.

The fine print of the prospectus gives some idea of what it cost to pull together this collection. The money manager pays Mr. Sprott an annual fee for the works equal to 3 per cent of the acquisition cost of the pieces. The total fee was $573,822 last year, the prospectus shows.

A bit of reverse financial engineering shows the paintings on the walls, and the sculpture in the lobby, originally cost Mr. Sprott $19-million.

sehgal wins big

Eric Sprott isn't the only hedge fund manager in the spotlight, as Dynamic Funds' Rohit Sehgal took home an armload of hardware Wednesday at a New York mutual fund award ceremony.

Mr. Sehgal, respected on the Street for both his performance and his aggressive trading, won the best event-driven hedge fund award at the first North American Lipper Hedge Fund Awards. Lipper selected the Dynamic Power Hedge Fund ahead of 101 competitor funds in North America, as the fund has top performance over three years, with an average 48-per-cent return, and five years, where it's best of class with 61-per-cent annual performance.

See Andrew Willis's blog at globeandmail.com/blogs/streetwise

© 2007 The Globe and Mail. All rights reserved.

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