Divisions over the development of Canada's hedge fund industry
There are divisions as to whether Canada’s hedge fund industry will grow as many domestic managers continue to struggle to attract foreign and domestic institutional capital.
Canadian hedge funds, which control roughly $30 billion in Assets under Management (AuM)), have found it difficult to institutionalise their businesses despite being so close geographically to some of the world’s most sophisticated pension plans. The challenges facing Canada’s hedge fund industry are numerous.
“The majority of Canadian hedge funds are still focused on high-net-worth-individuals. Oftentimes, the standard of operational infrastructure is not as high as it should be. When we have reviewed Canadian hedge funds, unless they are associated with a big bank or institution, they tend to be weaker operationally than their US counterparts,” said one operational due diligence head at a major institutional investor in Toronto.
Such shortcomings, added the operational due diligence head, included managers failing to separate the roles of chief compliance officer and COO; a lack of quality business continuity planning and substandard technology infrastructure, while some investor relations teams were “not that polished.”
Canadian hedge funds have tended to be smaller. One prime broker, speaking anonymously, said a typical manager ran between $25 million and $75 million. “There are a handful of multi-billion dollar firms out there too,” he added.
The lack of scale inherent in Canada’s hedge funds is a major factor as to why the country’s pension plans are reluctant to invest in the domestic alternatives industry. Many of these large-scale pension plans will have binding risk criteria and concentration limits, which prohibit them from investing in smaller managers. The majority of large pension funds will not typically consider a manager with less than $500 million.
This helps explain why the country’s investors have shopped abroad for their hedge funds. “There are 10 pension plans in Canada that are highly sophisticated, and all of the foreign managers market to them. The challenge for Canadian hedge funds is that they are very Canada focused in what they trade. These Canadian investors can therefore just go to a traditional Canadian asset manager rather than a more expensive hedge fund if they want exposure to the country's markets,” according to one manager.
Nonetheless, some believe criticism of Canada’s hedge fund industry has been unduly harsh. “I am genuinely excited about the future of the alternatives industry in Canada. We have seen a lot of fundraising and launches happening. Many of these firms are diversified and managing a number of different strategies including event driven, equity long/short and relative value arbitrage strategies. The industry is consistent and while it is not as large as New York, we are seeing some big launches which are attracting pension fund money,” said Bob Cancelli, executive director at CIBC’s prime brokerage business in Toronto.