Canadian banks are at risk warns hedge fund

Crescat Capital sees recession ahead for Canada, trouble for lenders

Canadian banks are at risk warns hedge fund
Steve Randall

One of the top performing US hedge funds is shorting Canadian banks in the belief that a recession is coming.

Crescat Capital says that more than 80% of Canadian companies are not generating enough cash – the highest share in the world – and global macro analyst Tavi Costa told Bloomberg that the big banks will be come off badly.

He said that if monetary conditions were tighter, these companies that are not generating cash would be bankrupt.

The firm returned 41% in its Global Macro Fund in 2018 and 32% in its Long/Short Fund, putting it in among the best performers of last year, which saw the hedge fund industry posting a 4.1% loss.

Costa did not name the banks that the fund has shorted but he did say that the housing market poses a risk to financial institutions, suggesting the largest lenders would be impacted.

"Most of these banks are off their highs and have just started to break down," Costa said.

With a cooling housing market, Costa warns that high levels of household debt make the market – and wider economy – vulnerable to changing conditions.

“China is in the process of reversing its key role as a driver of global economic growth,” Costa told Bloomberg. “Countries like Canada and Australia, and their respective housing markets, are the economies most vulnerable in this scenario.”

Crescat Capital’s CEO Kevin Smith has been talking to Blomberg TV and repeated the concerns of his analyst.