Analysts question latest move by Portus

(February 10, 2005) A decision by hedge fund firm Portus Alternative Asset Management — under investigation by securities regulators — to suspend account withdrawals indefinitely is a troubling development for investors, industry analysts say.

In a release posted Wednesday night on its website, Portus said it wanted to clear up recent press reports that have created “significant misunderstandings” among Portus clients and stakeholders.

“Portus has invested investors’ money in such a way that if they hold their investment to maturity, they will receive 100% of their principal, plus the upside return linked to an actively managed fund of hedge funds,” reads the company’s statement.

“The only way investors face any loss of their principal is by withdrawing funds from their investment account prior to the maturity date of the bank note. This bank note is issued and 100% backed by one of the world’s major financial institutions. Naturally, investors are encouraged not to withdraw funds.”

The release goes on to explain that Portus has suspended withdrawals from managed accounts because the company “has a responsibility to protect the value of the investments for the large majority of investors who wish to hold their investments to maturity.”

The freeze seems to contradict the company’s own policy. On its website, Portus also states that “although our investment objectives are medium to long term, you are free to withdraw all or part of your investment at any time.”

“One of the fundamental characteristics of investment funds is the ability to redeem your units should your investment objectives change,” says Rudy Luukko, investment funds editor at Morningstar Canada. “Portus has slammed the door on any redemptions and locked-in investors indefinitely. And we don’t know how long they expect to have this freeze in place.”

“One of the flags raised when I first looked at the product is that most hedge funds don’t offer that kind of liquidity,” adds industry analyst Dan Hallett, of Dan Hallett & Associates in Windsor, Ontario. “If you look at some of the better hedge funds, they will allow a monthly liquidity, but usually require 60 days notice on top of that, so there’s really a 90-day period to liquidate positions, which seems more suitable to these types of investments.”

“To offer weekly liquidity, and then turn around and freeze redemptions seems like a contradiction,” Hallett points out. “They may just want to protect their revenue stream, but I don’t think a hedge fund should offer that kind of liquidity in the first place.”

There are a lot of unanswered questions, says Luukko. “And I think the wider issue is what impact this will have on the reputation of principal-protected notes that are tied to hedge-fund strategies.”

Last week, the Ontario Securities Commission ordered Portus to stop opening new accounts and to stop accepting new assets under a temporary order. That order could be extended at a hearing scheduled for February 17. Regulators in New Brunswick and Nova Scotia have issued similar orders.

The OSC issued the order “in the public interest” following actions by the manager that the commission says appear to contravene sections of the Ontario Securities Act regulating the firm’s selling practices and record keeping, as well as investor suitability.

Hallett says that since regulators have prevented Portus from accepting new money from investors, the case is serious. But he says suggestions from some media outlets that all the cash invested in Portus products is at risk might be overblown. “I think it’s more a matter of asking whether they were misleading people,” he says.

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“There’s an extra layer here, the product is a called the BancNote Trust, so people are not buying a note they are buying a trust,” he explains. “There’s nothing in the portfolio management agreement that says you are buying a bank-guaranteed obligation.”

Portus manages accounts for about 26,000 clients across Canada and has about $800 million in assets under management.

Filed by Doug Watt, Advisor.ca, doug.watt@advisor.rogers.com

(02/10/05)

Doug Watt