Hedge Funds Trading on the TSX?

I must admit I've been jealous of those investors qualified to purchase hedge fund positions. I have a dream goal of entering a long term position with Stephen Palmer's AlphaNorth Partners Fund, which I've discussed before in past blogs. The returns over time are excellent, not without higher risk of course, and seem to perform much better than the index and most mutual funds.

You need to have money to make money

The problem is, however, that you must be an accredited investor or have a great deal of cash to enter a position in most of the highly ranked hedge funds in Canada.

The FUND of Hedge FUNDS Investment

I've found a fund of funds, trading in a manner most similar to an ETF, of three top hedge funds available for investment on the TSX.
Star Hedge Managers Corp .

These "funds" issue "units" which trade like stocks, and aim to provide long term capital growth by investing in a portfolio of private investment funds managed by three of Canada's leading portfolio managers: Rohit Sehgal, Eric Sprott, and Frank Mersch. The Fund invests on a equal weighted basis in units of the Dynamic Power Hedge Fund (Sehgal), the Sprott Hedge Fund (Sprott) and the Front Street Fund (Mersch).

Trading Like a Stock is An Attractive Alternative

These "units" are attractive to me since investing in these funds individually is typically only available to high net worth or institutional investors requiring a $100,000 or $150,000 initial investment.

For example, the Dynamic Power Hedge prospectus can be found here.  A $150,000 investment in 2002 would be worth around $2 million dollars today.

The Sprott Hedge Fund boasts an 805% cumulative return since inception in November 2000 which correlates with 23.4% annualized compared to a 4.9% loss by the S&P500 (CAD) over the same time. Therefore a $100,000 investment in 2000 would be worth over $800,000 today.

The Front Street Canadian Hedge Fund launched in August of 1999 has returned an average of 10.9% per year compared to a 6.4% return by the S&P/TSX Composite Index over the same period.

The Canadian Newswire reported on March 31, 2011 the availability of the Star Hedge Manager Corp II units.

Star Hedge Managers Corp I and Star Hedge Managers Corp II trade on the TSX under the symbols XHM.A (priced at $5 on opening day Dec 31, 2008 and closing at $15.80 on May 5, 2011--an over 300% increase in less than 2.5 years) and XHG.A (ranging from $9.40 -$10.40 since launching on April 20th, 2011).

If you know of any other Canadian Hedge Funds or groups of hedge funds trading on the TSX in this way, please drop me a line. I would love to review them here.

Happy Investing

Disclosure: the author does not own positions in any of the funds listed here at time of publishing.

The Alpha of Canadian Hedge Funds

Meet The Top Dog of the Canadian Hedge Funds

I recently overheard a couple of colleagues chattering about investing in hedge funds and between the technical jargon and comparison gibberish, the only phrase I clearly understood was this:

"If I had 150 thousand bucks, I'd give it to Steve Palmer."

Researching the Markets

After a single quarter of trading, I seem to be at a near break-even point. Having heard horror stories of newbie traders losing 50% or more of their investment dollars in the early days of their trading, I suppose a mere 0.5% earnings profile is not such a bad place to start. Of course I could have earned more working at my regular job, but I see it as an educational  sacrifice that cost far less than any university level course on the markets.

So what did I learn? Other than "keep green on your screen", a favorite Toni Turner sign-off to her twitter updates, I learned that there are good gurus, bad gurus, good funds, bad funds, and that everything is in flux always. I learned there is no sure thing and that psychology plays a major and often under-rated factor in the markets. I learned that technical indicators and Newton's laws of physics also play an often under-rated factor in the way the markets naturally move. I learned I am stupid about these matters and should listen to people with a track record while at the same time executing my own due diligence to confirm that at the very least I agree in principle with the advice.

So what does this have to do with Steve Palmer. Well, everything. Mr. Palmer fulfills the criteria of a good guru and manages a fund that fulfills the criteria for a first class investment. Of course, I would need 150 grand to walk through his Front Street office door, but hey, at least I have a goal.

So Who Is Steven Palmer?

Steven Palmer is a founding partner and Chief Investment Officer of AlphaNorth Asset Management, and runs their Partner Fund. After launching his investment career in 1997, Mr. Palmer became the Vice President of Canadian Equities at a major financial institution and subsequently managed a pooled fund of primarily small cap Canadian companies achieving a first rate ranking and returns of 35.8% over 9 years as compared to 10.0% for S&P/TSX Composite Index and 13.0% for the BMO small cap index.

He has an impressive track record for his young years and seems to make people lots of money, particularly investing in small cap Canadian companies, one of the most volatile, yet potentially most lucrative, investment fields.

Why is AlphaNorth so Attractive?

AlphaNorth Partners Fund is a "long biased hedge fund" launched in December, 2007, focussing on Canadian equity securities and offered to "accredited investors".

Returns Since Inception
(Dec1, 2007 to February 28th, 2011)
                                                            Annualized    Cumulative
AlphaNorth Partners Fund               48.7%            262.9%
TSX Venture Index                           (4.1)%            (12.6%)
TSX Total Return Index                    4.0%               13.7%

Sure the fund dipped low in 2008 with nearly every other fund on the market, but it regained its lofty standing with a vengeance to earn an average annualized return of 48.7% since December, 2007. Big performance, big fund and a big ticket price of $150,000 initial investment. Not for the average Canadian, not for the faint of heart.

The Historical Accredited Investor

Bottom line, you have to have money to make money. And you need to be an "accredited investor" to buy a piece of AlphaNorth. A hedge fund is a high risk investment. And historically, the "accredited investor" class was designed to protect investors and investees against market crashes that could potentially wipe out personal or fund net worth.

Following the 1929 market crash and subsequent great depression, the US Congress intervened to set strict rules in place to in essence, "clean up" the practice of securities investing. Thus the Securities Act of 1933 and subsequent birth of the SEC, led to law that was passed which required companies to provide detailed information to investors so that they could make informed decisions. This Act also defined which investors could invest in certain securities, thereby creating the "accredited investor".

An accredited investor was defined as having "a net worth of at least one million US dollars or having made at least $200,000 each year for the last two years ($300,000 with his or her spouse if married) and have the expectation to make the same amount the following year."
Accredited investors have access to a level of investments such as hedge funds and other potentially high yield funds that the average Canadian unfortunately does not. And in all fairness, the law exists to protect that average Canadian from losing everything they own if a volatile investment such as a hedge fund crashes and burns up their life savings. It also protects the fund from having low risk tolerant investors run away at the first sign of a negative market flux.

Hedging With The Hedge Funds

From Wikipedia: "A hedge fund is a private investment fund which may invest in a diverse range of assets and may employ a variety of investment strategies to maintain a hedged portfolio intended to protect the fund's investors from downturns in the market while maximizing returns on market upswings."

Investors in hedge funds typically pay a management fee that goes toward the operational costs of the fund, and a performance fee when the fund’s annual return is higher than that of the previous year.

Check out Steven Palmer's AlphaNorth Partners Fund here.

Happy Investing