Study sheds new light on Canadian hedge fund market

With 33% of Canadian hedge funds only three to five years old, the market is still in its infancy. That, says James Niosi, vice-president of NBCN Prime Brokerage, means the industry has only one place to go — up.

“While the Canadian hedge fund market is maturing, it still has plenty of room to grow,” he says.

Earlier this week, NBCN released a comprehensive study comparing the Canadian hedge fund market to its global counterparts. Surveying 35 hedge fund managers in Canada, the report concluded that “Canadian hedge fund managers are well positioned to have an increased share of the allocation pie.”

“Canadian hedge fund managers are looking to raise assets,” says Niosi, “and that’s both locally and globally.”

The study, which compared the Canadian market to 2,451 hedge funds from around the world, says that 77% of Canadian hedge fund managers hope to raise additional capital in 2007. More than half of those surveyed said they’ll use futures/commodities strategies, while 22% will use global hedge funds.

Besides pointing out that Canadian hedge funds are relatively new and growing — 25% more hedge funds exist today than in 2005 — the study revealed other key differences between the Canadian and global markets. About 30% of Canadian hedge funds report assets between $10 million and $49 million, while 21% of hedge funds globally exceed $5 billion. Only 4% of hedge funds north of the border can claim similar assets.

“Other than infancy,” says Niosi, “exposure to the global audience or lack thereof [has resulted in lower assets for Canadian hedge funds]. Hedge fund managers want to be left to do what they do best — that is, trade the markets and manage money. They typically do not wish to be on the road all week. This is giving rise to more efforts placed on capital introduction services and external marketing programs.”

The study also found that banks and insurance companies have taken a very limited interest in Canadian hedge funds. Globally, these institutions make up 11% of hedge fund investors, but in Canada they rank below public pension funds at 0%.

However, general partners and fund employees account for 25% of the total investors in Canadian hedge funds, while that number is only 8% globally.

Niosi says that percentage “lends credence” to the industry, but as funds grow, the number should decrease. “The size of the funds in Canada is smaller, so on a percentage basis, the number is significant,” he says. “It would be safe to say that as the fund grows, and if it’s open to institutional allocations or individual allocations, that those numbers will drop.”

But the biggest investors both globally and locally are individuals and family offices. In Canada, 45% of investors fall under this category, while 33% of investors in global hedge funds are individuals or family offices.

The study also shows that Canadian hedge fund managers aren’t just investing in local funds. Managers have their sights set on Western Europe, Japan, Asia and Central Europe.

Filed by Bryan Borzykowski, Advisor.ca, bryan.borzykowski@rci.rogers.com