Alternative investments not always transparent, says Young

Former mutual fund analyst and Portus consultant Duff Young admits that, even for him, due diligence on alternative products can be a tough row to hoe. That’s not to say advisors should avoid alternative investments. However, advisors must make sure that the product is as advertised, and be wary of signing documents that might prevent them from putting the best interests of their clients first.

Young says his non-disclosure agreement with Portus Alternative Asset Management, at the time called Paradigm Alternative Asset Management, precluded him from consulting industry experts who would have been able do the appropriate due diligence on Portus products. “It tied my hands and prevented me from making inquiries.”

Young, whose explosive e-mail about Portus was made public in National Post, asked some pointed questions shortly before his relationship with Portus ended. According to the Post story, Young questioned the robustness of the principal guarantee offered by Portus on its BancNote Trust products as well as its cost.

In a telephone interview at the time, Young said he couldn’t go further than what was already public, citing the non-disclosure agreement. He also said his e-mail about Portus quoted in the newspaper “was obtained by deceit” by another fund company.

Portus has sued critics in the past, such as Toreigh Stuart at BluMont Capital, Raj Lala at Pescara Partners and Davee Gunn at Abria Funds. Young did tell Advisor.ca that he wrote the memo at a time when he was thinking of severing his relationship with Portus. “I was seeking legal counsel. I gave it to a hedge fund industry expert in this field so that he and I could work with counsel and understand my exposure to Portus.”

Apart from the issues outlined in the e-mail, Young also had concerns about who was running the money for Portus’s clients. The offering memorandum for Portus’s Market Neutral Preservation Trust listed pension consultant and fund of funds manager James Park as the fund’s sub-advisor.

However, the BancNote Trust series lists Paradigm (now Portus) Alternative Asset Management as the investment advisor that “may retain world-class asset managers in structured funds and alternative investment activities,” who may be affiliated with an unspecified Schedule I or Schedule II bank.

According to filings by the OSC, “The structure of the investment provided by Portus appears to be such that clients’ funds flow through bank accounts held by Portus on behalf of Portus’s off-shore counterparties, and eventually flow to an account held by Portus. The company deposits sufficient client funds into five- to seven-year term notes issued by Société Générale (Canada) to guarantee a minimum return of the principal invested with Portus. Société Générale then promises to return to the holder of the note (BancNote Trust) the higher of the principal invested with Portus or the return achieved by a fund of funds selected by Portus. This appears to be the basis for Portus’s representation to clients that their investments are guaranteed. “

Dow Jones Newswire reported last summer that Park, chair of Paradigm Global Advisors, had had a consulting relationship with Portus, but had never managed any funds. “Given the nature of the consulting agreement, we were uncomfortable with the fact that they were using and calling their franchise ‘Paradigm Asset Management’ and we requested and they moved on to change the name,” Park told Dow Jones.

“I did believe aggressively in James Park. That was a key driver in my willingness to work with Portus,” said Young. “When I learned that that relationship wasn’t what I had thought, I was frustrated.”

In fact, Young did do his due diligence on Park. “From the bottom of my heart, I am a huge believer in alternative investments, mostly because all the traditional fund managers that we all love do this with their own money,” he added. However, he admitted that “even as an analyst, I find it challenging to fully understand products that are not transparent.”

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“I spoke at all these Portus events in favour of alternative investing. I empathize with the challenge that every advisor faces in doing due diligence on any alternative product.”

Filed by Scot Blythe, Advisor.ca, scot.blythe@advisor.rogers.com.

(02/16/05)