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Canadian Hedge Fund Managers Need to Want to Play to Win

October 24, 2017

Canadian Hedge Fund Managers Need to Want to Play to Win

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Last month I attended a conference dedicated to bringing Canadian hedge fund managers together with Canadian investors. One of the organizers asked me whether I thought next year’s edition should include US and other foreign managers as a means of broadening investor appear. My answer was “no”. Canadian investors already have a favorable predisposition to US and foreign managers. In contrast, Canadian managers are under-marketed and therefore benefit greatly from conference exposure. US and foreign managers would only dilute their networking opportunity.

Leading Canadian Pension Funds Demand Operations

Canada is blessed with some very large and sophisticated Pension Fund investors. In order to increase their appeal, Canadian managers should adopt a first class approach to operations. If not, they will be challenged to compete at raising institutional capital. Some may argue that that may not be such a bad thing. After all, the loyalty of institutional capital is far lower as compared to that of high net worth investors’ whose wealth tends to be much stickier. Moreover, management fees charged to high net worth investor are typically 5-10 times higher due to lower bargaining power.

Don’t Ask the Regulator Whether you can Publish Financial Statements Less Frequently

A reputable industry participant and good acquaintance of mine attended a morning round table that was hosted by a regulator. The goa‎l of the event was to listen to industry participants and determine whether any new initiatives warrant implementation. My acquaintance shared with me that one hedge fund manager asked whether the regulator could remove the requirement that stipulates that managers must make semi-annual un-audited financial statements available to investors. The rationale being that eliminating the requirement would enable his firm to save approximately $10,000 annually. Unfortunately, this question does not reflect the type of mindset that will position this manager to win (i.e. to be successful at raising a growing amount of institutional wealth to manage). ‎No investor should be willing to allocate to managers that nickle-and-dime in such a manner.

Canadian Managers Slower to Adopt GIPS Compared to US Counterparts

Though it is true that many Canadian investors prefer allocating to foreign managers whose exposures provide greater liquidity, there is also the question that Canadian managers appear slower to adopt industry best practices. Take GIPS for instance. Many Canadian hedge fund managers are indeed slow to adopt GIPS. This is in contrast to their US counterparts who view GIPS as a requirement to capture institutional investor consideration. Many Canadian managers state that their high net worth clients are not demanding GIPS because they are unfamiliar with it and so therefore they see no immediate need. Some smaller institutional investors have lower standard requirements and also do not request GIPS. The famous line from Field of Dreams was: “If you build it, they will come”. The same holds true for managers with respect to GIPS but with a spin: “If you implement it, there is a far better chance that institutional investors will consider allocating a portion of their wealth to you.” ‎

Concluding Remarks

Over twenty years ago my Dale Carnegie instructor would begin each session by asking the class to all join in at once in saying: “If you always do, what you’ve always done, you will always get, what you always got”. ‎Upon reflection, this mantra is quite appropriate in describing the current plight of Canadian hedge fund managers. Many Canadian hedge fund manager presentations are focused solely on discussing their investment strategy – this is not enough. Investors want to be confident that their capital is safe.‎ Taking measures to implement best practices, and identifying and documenting gaps that need to be addressed goes a long way towards becoming a First Class Hedge Fund Manager. Those that do with passion and provide granular description as opposed to blanket statements are sure to elevate their relative standing in the eyes of investors. If you think and act like a Big Leaguer then you will become one.

Phocion Investment Services (Head Office) | 1010 Sherbrooke Street West, Suite 1800 | Montreal, Quebec | H3A 2R7 Canada

T. 514-564-9955 | info@phocioninvestments.com | www.phocioninvestments.com

 

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