Fight brewing over proposal to loosen the hedge-fund Principles of Canada

Based on where you stand, investors are exposed by hedge funds to costs and risks plus they give individuals the chance.

That is the cornerstone of a tussle in Canada, in which principles that would allow investors to move into hedge funds and other items like derivatives and commodities as soon as next year are opposed by the leading watchdog. Financial institutions say involvement is a no-brainer.

“A move from a regulatory standpoint to permit retail investors access is a fantastic thing and we’re eager to see that happen,” said Paul Taylor, chief investment officer at BMO Global Asset Management, which manages about $320-billion. “We want to give clients exposure to plans that provide very good returns” in comparison to their hazard, ” he said.

Canadian authorities are proposing to loosen the rules on participation from investment consultants and fund managers. The desire to ape the industry in america is another incentive.

The $ industry of Canada is seen by businesses siphoning cash from strategies like exchange-traded funds and doubling by attracting investors. Investor protection groups, on the other hand, sense a cash grab.

‘No evidence’

“This initiative is mainly driven by the industry’s desire to create more fees as opposed to retail investor demand,” said Marian Passmore, director of policy in the Toronto-based Foundation for Advancement of Investor Rights. “There is no evidence from the authorities that retail investors will be better off when most will have trouble understanding the various characteristics and dangers.”

Under the new system, hedge funds will be available to retail investors provided they adhere to certain criteria, including offering daily liquidity, filing a prospectus and publishing interim and annual results — like the so-called liquid alternative products in the USA, Britain and Europe.

Investing is limited by the current laws of Canada or licensed individuals.

“Hedge funds typically offer less liquidity and disclosure when charging competitive fees, all things that would normally turn off most retail investors,” said David Stowell, professor of finance at Northwestern University’s Kellogg School of Management in Evanston, Ill.. Many Canadian hedge funds will be “prepared to make concessions to induce retail investing,” he said.

Sifting responses

Canadian Securities Administrators, formed from each of the provinces and territories of the country, is currently overseeing the rule change. Kristen Rose, a spokeswoman said authorities are sifting through responses from an industry consultation. She said when the regulations may be implemented, it is too early to ascertain.

Funds are exposed as they can try to profit from gambling that stocks will rise in addition to falling markets.

The most notable Canadian collapse happened in 2005, when authorities shut Toronto-based Portus Alternative Asset Management Inc., whose co-founders siphoned off more than $100-million, some of it sent to Israel to get diamonds.

Retail participation’s challenge is to ensure the products are fully understood by advisers and will help investors keep the risks under control, said a lawyer at McMillan LLP in Toronto, Michael Burns.

This opinion was echoed by FAIR’s Passmore, who said the industry needs more training to comprehend the goods once it opens to investors and advise customers.

Industry push

The drive for hedge funds comes from investment consultants, who see endowment and pension funds like Yale University in the USA using them to boost yields at a time of record-low rates of interest that were close, said Hanif Mamdani in RBC Global Asset Management. He helps manage about $7-billion as the head of investments of the firm.

“There is value for customers to pursue non-traditional funds concerning tailoring their risk-adjusted returns,” Mr. Mamdani said from Vancouver. “Canada is underrepresented in the hedge-fund market.”

Also on the Planet and Mail

Carrick Talks Money: Is Canada returning to an ‘inflation country’? (The Globe and Mail)

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