Front Street Capital 33 Yonge Street, Suite 600 Toronto, ON M5E 1G4 CANADA Gary Selke President
www.frontstreetcapital.com

Canadian Hedge Fund Market

With the search for ways of obtaining superior returns becoming harder and harder, the Canadian capital markets are an undiscovered gem for investors. For years Canadian hedge fund managers have been taking advantage of the under-researched Canadian markets and providing investors with superior returns, and international investors searching for alpha are beginning to recognize Canada as a remarkable investment opportunity.

The Canadian hedge fund market has experienced a boom in the number of funds and related products offered in the past six years. From a pool of less than 50 funds and only C$2.5 billion in assets under management in 1999, the industry has experienced substantial growth with over 200 funds with assets amounting to approximately C$30 billion today. Canada now offers world-class hedge fund products whose track records can easily compete with their international counterparts in the United States and Europe.

Within the Canadian hedge fund industry, approximately C$15 billion of assets can be attributed to single-manager funds, while the other C$15 billion are institutional assets. Although high-net-worth investors and institutions form the bulk of assets, Canada has seen the growth of a relatively large retail market since 2000, compared with the U.S. and the U.K.

Three tiers characterize the Canadian hedge fund industry. The top tier is occupied by a relative few multi-billion dollar firms, while in the middle there are a small number of mid-sized firms that run assets ranging from C$100 to C$600 million. The largest number of firms in the industry occupy the bottom tier with assets ranging from a few million dollars to as much as C$100 million.

Long/short equity has emerged as the dominant investment style within the Canadian hedge fund industry, accounting for approximately 50% of the market. However, there are many other strategies for investors seeking more exposure to various investment styles.

The surge in commodity and energy prices over the past decade has helped awaken investor interest in resource-rich Canada. Toronto has surpassed London as the dominant centre for resource listings, with the largest number of listed oil and gas and mining shares in the world listed on the Toronto Stock Exchange. Canadian managers have capitalized on this renewed demand for resource-based returns by launching a slew of niche funds to meet domestic and international demand for this type of product.

Underinvestment in new resource projects over the past decade, combined with significant GDP growth in China and India has provided a boom in natural resource investing. In addition, because the median size of Canadian companies tends to be much smaller than a typical U.S. or European median market cap company, the Canadian capital markets tend to be under-researched and overlooked by analysts relative to larger world markets. This provides opportunistic managers with the ability to take advantage of these market inefficiencies. Leading Canadian managers have been able to seize these opportunities and have been generating returns in excess of 20% per annum for the past five years.

International investors have recognized that while Canada can provide the rich returns that resources offer, it also provides investors with an investment in a well-regulated and stable environment when compared to other politically and economically volatile regions of the world with similarly abundant natural resources. To facilitate the increased demand for international investments, managers have established offshore funds in various locations such as Bermuda, Barbados, and the Cayman Islands.

Canada has long been considered a good place to do business. Coupled with a strong dollar, stable inflation, and low interest rates, Canada’s mature banking system and financial market have provided the Canadian hedge fund industry with the perfect conditions to grow and succeed. Growth in the infrastructure of prime brokers and other service providers has kept pace with the hedge fund industry and are highly competitive with their international counterparts when it comes to costs. The major Canadian banks have developed strong brokerage arms, while American and European service providers have recognized the opportunities that are abound in Canada and have exported their expertise to the Canadian capital markets.

The Canadian hedge fund industry is well positioned to experience substantial growth in the future. With the ongoing boom in resources, combined with a strong economy, low inflation, and a strong appreciating dollar should continue to expand the hedge fund industry in Canada for the foreseeable future.

Front Street Capital
33 Yonge Street, Suite 600
Toronto, ON M5E 1G4 CANADA

Gary Selke
President

www.frontstreetcapital.com

 

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