Epic Capital Management Inc. is closing its flagship hedge fund in what could be the precursor to a number of shutdowns in the troubled industry.
The Toronto firm's assets tumbled from $300-million to $200-million as markets crashed and investors asked for their money, leading the managers to decide that giving remaining investors in Epic Limited Partnership their cash back was the prudent move, said founder and chief executive officer David Fawcett.
Epic focused on finding underpriced mid-sized Canadian companies, but that strategy couldn't protect the firm from the market meltdown. Epic's main fund has fallen about 43 per cent so far this year.
"We wanted to do it while we could and didn't have a gun to our head," said Mr. Fawcett, who added that he expects a "pretty orderly unwind."
Epic's performance is in line with many of its peers, suggesting other funds may not be far behind. More than a dozen Canadian hedge funds are down over 40 per cent this year - meaning they have had a bigger drop than the country's benchmark stock index.
The declines have undermined the rationale for investing in hedge funds, which were pitched based on their supposed ability to generate positive returns in any market.
Epic's move also affects the $35-million Arrow Epic Fund, which it runs as an external manager for Toronto-based Arrow Hedge Partners Inc. That fund, which plunged 45 per cent this year as of last Friday, is also being wound down.
"They [Epic] just feel that if people are all going to want to rush for the exits in the fund, that they are going to be pro-active and get in front of it," Arrow Hedge CEO James McGovern said. "I think that is the honourable thing to do."
While Mr. McGovern was informed Monday of Epic's decision, he said he wasn't surprised. He has been predicting that Canada's hedge fund industry would shrink within a year to about $20-billion in assets from about $30-billion.
Globally, hedge fund pioneer George Soros expects an even bigger contraction in the global hedge fund industry, which is estimated to be worth more than $2-trillion (U.S.).
"The hedge fund industry is going to move through a shakeout," he said in a speech at the Massachusetts Institute of Technology. "In my estimation, [the industry] will be reduced in size by anywhere between half and two thirds."
If Epic investors approve the closing, they should get about 80 per cent of the money they are entitled to by early next year, and the remainder as Epic unloads tougher-to-sell investments, Mr. Fawcett said. The firm, which had three partners and six employees, is letting five workers go.
Epic had already sold most of its stocks and moved 75 per cent of its assets into cash.
The problem was that a chunk of the remaining capital was in illiquid private-placement investments, which are tough to sell right now. If Epic kept going, investors who stuck it out would have owned too high a proportion of those investments, he said.
As a long-short hedge fund, the firm could employ short selling to protect against losses, but the fund didn't have big short positions, he said.
"You really thought if you got in a down market you would have shorts that would help you," Mr. Fawcett said. "It was such an odd, all-pervasive, global situation that it caught us and the world by surprise."
© 2007 The Globe and Mail. All rights reserved.
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