Is the Canadian hedge fund market ready to take off?

Portfolio manager Michael White sees “tremendous opportunity” in Canadian hedge funds, but are investors ready to embrace them?

Is the Canadian hedge fund market ready to take off?

Canada often drifts into the shade cast by its juggernaut neighbour south of the border. The hedge fund market is a good example of this. While the U.S. is viewed as a world leader in the space, Canadian firms, restricted by regulations, have lagged. The CSA is proposing changes that would make hedge funds available to retail investors, but are Canadians ready to embrace hedge funds?

Michael White, a portfolio manager at ‎Picton Mahoney Asset Management, sees “tremendous opportunity” for investors in Canadian hedge funds. “There were some bad actors early in the history of the Canadian hedge fund landscape and that’s part of the reason why the regulators have been so intent on this side of the business,” White says. “It is difficult on one hand, in that providing products by offering memorandum is less straight forward for advisors here in Canada than it would be in more developed markets like the UK or the U.S.”

White believes that both accredited and retail investors should be able to own products with hedge-like features. Despite the regulatory environment, he thinks hedge funds have an important role to play in Canadian portfolios. There is trepidation around hedge funds in Canada but a lot of that is, according to White, down to a lack of education. The AUM in hedge funds in Canada is around $26 billion, half of that amount is made up of investments made by the Canadian Pension Plan.

“That’s an important frame of reference for individual investors – they already own hedge funds if they contribute to the CPP and expect to benefit from it in their retirement. Hedge funds are not just something esoteric for highly accredited, affluent investors,” White says. “We’ve decided to dedicate our resources to providing hedge solutions within a prospectus or mutual fund offering that allows hedging pools that short up to 20% and use options up to 10%. There are discussions in the regulatory world around taking that shorting limit up to 50% and we welcome that.”

White does expect to see the appetite for hedge funds grow amongst Canadian investors, but he also thinks that proper guidance is necessary if investors are to really benefit. “It’s first important to break down the messaging that hedge funds are run and gun, an impression that has been created by negative press over the years,” White says. “You don’t see too many hedge funds that make 6 – 8% returns with excellent risk management making headlines. It’s not sexy print.”

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