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Hedge fund launches in dire times

FUNDS REPORTER

Monday - when North American markets cratered - was not the most auspicious day to launch a closed-end fund of hedge funds, but Star Hedge Managers Corp. has been quietly trading since then.

This fund invests in the hedge funds or portfolios run by Eric Sprott of Sprott Asset Management Inc., Rohit Sehgal of Dynamic Mutual Funds Ltd. and Normand Lamarche of Front Street Capital.

Star Hedge Managers, which closed down 39 cents yesterday at $9.35 on the Toronto Stock Exchange, raised $75-million through an initial public offering of $10 a unit. It had targeted raising $500-million.

"I'm surprised" that it did raise $75-million given the tough market environment, said Phil Schmitt, chairman of the Canadian unit of the Alternative Investment Management Association. "There's still a market for quality managers."

Each unit of the fund consists of a class A share and a warrant to buy one share at $10.35 a unit on Oct. 30, 2009.

Bob Thompson, an alternative investment strategist with Canaccord Capital, said the new fund is a way for investors to gain access to "some of the best money managers in the country" without having to come up with the high minimums required by hedge funds.

But the market price of a closed-end fund can fluctuate independently, or trade at a discount to the net asset value of the fund, so investors may end up getting less money when they sell "because that is all the market is willing to give [at that time], Mr. Thompson cautioned.

Still, the returns of the three managers do not move in tandem with each other even though their stock picks have a bias toward the beaten-up resource sector, he added.

Mr. Sehgal and Mr. Lamarche differ from Mr. Sprott who has a big gold weighting and shorts U.S. stocks, said Mr. Thompson, author of the soon-to-be released Stock Market Superstars.

For instance, the closed-end fund invests in the F units of Mr. Sehgal's Dynamic Power Hedge Fund, which has fallen 33 per cent this year as of Sept. 26, according to Globefund. Mr. Sehgal's fund, however, had an average annual return of 48 per cent at Aug. 31.

The closed-end fund also invests in the new class I units of Sprott Hedge Fund LP II. The Sprott fund's class A units have only declined 3.7 per cent this year as of Sept. 30.

Star Hedge Managers also invests in a managed account run by Mr. Lamarche, who uses the strategies employed in funds such as his offshore Front Street Resource Hedge Fund. That fund is off 19 per cent this year as of Aug. 31.

© 2007 The Globe and Mail. All rights reserved.

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