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Riding the storm

Spotlight Hanif Mamdani

Head of Alternative Investments,

PH&N and RBC Asset Management, Vancouver

Remember when your significant other was away and you cleaned the house, made those niggling repairs and lost eight pounds? As if that would ever happen. But 43-year-old Hanif Mamdani pulled off a rare feat during last year's market bust: He made money as rival hedge fund managers steered their Boxters into walls. The series A units of PH&N's Absolute Return Fund posted a one-year return of 35.5% to July 31, compared with a 17.7% decline in the S&P/TSX Total Return index. He spilled the beans to me recently about his strategy-past and future.

Other funds got burned by having too many eggs in just one basket. This is a multistrategy fund, and we were judicious in applying hedges on the risks we didn't want, such as the U.S. dollar, interest rates and the broad equity market.

One mistake I made was underestimating the vulnerability of the U.S. banking and brokerage industry. I also didn't anticipate the volatility of credit spreads for large financial institutions, including relatively solid Canadian banks.

For me, the point of maximum concern was last Sept. 29, when the House of Representatives initially rejected the White House's historic $700-billion (U.S.) financial rescue package. That was a dark moment.

After the mess created by complex and highly structured products like ABCP, CDOs, SIVs, etc., many professional investors will view financial innovation with a healthy dose of skepticism and ask, "Why is this product necessary and who ultimately benefits from it?"

I spent 10 years on Wall Street.

I ran the convertible bond trading desk at Salomon. On the sell side, it's very transactional and short-term. On the buy side, you try to make decisions looking out one, two, three or four years. It's no less intense, though.

Economics and finance, at its root, is the study of incentives. Most actions taken by CEOs, or by hedge funds and most investment bankers, can be explained by their compensation structure. If you understand that, you can predict things.

We charge an MER of just 1.45% annually on the A units, and we don't take 20% of profits above a benchmark return, like other hedge funds do. That structure aligns our interests with those of the clients.

A trick financiers like to pull? Understating the advertised size of a public offering to create an artificial scarcity, thereby maximizing demand and price, and then dramatically increasing the size of the offering in order to meet this outsized demand.

Some corporate executives set artificially low hurdles for earnings and then beat them, knowing that quantitative models used by hedge funds trigger buy programs on such an event. Only some players do this. Many execs deal with investors in a straightforward and fair manner.

I'm concerned about the U.S. dollar, because it seems that U.S. debt levels will creep higher. Economics win out in the end.

Equities for the long term still works, because if you want to build wealth, you have to hold pieces of good businesses. The important thing is the price you pay. Entry point valuations are much better now when you consider where we've come in 10 years. Back then, equities were trading at 28 to 30 times earnings.

© 2007 The Globe and Mail. All rights reserved.

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