Analysis: Canadian hedge funds' growth dreams face tough reality

Thu Jan 31, 2013 2:01pm EST
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By Alastair Sharp

TORONTO (Reuters) - Canadian hedge funds will likely remain more boutique than big box in the future, as lack of scale, poor returns and difficulty accessing big investors weigh down growth.

Helped by start-ups in and around Toronto's financial district, the Canadian industry is estimated to manage more than C$30 billion ($29.73 billion), up from about $15 billion four years ago.

Some managers think that could more than triple in coming years, but it would still be miniscule compared with the roughly $2 trillion managed by U.S. and other foreign hedge funds.

The likely winners will be funds that offer the diverse strategies and risk-management that have attracted institutional and wealthy retail investors to the U.S. industry, leaving many smaller managers to merge or fade to irrelevance.

"The days of old, where you just had to show some good performance and maybe people will allocate assets to you, those days are probably gone," said Jonathan Aikman, a Toronto and New York-based lawyer who has written a book on alternative investments.

Even deep-pocked Canadian pension funds, some of which pioneered hedge fund investment, have been slow to put their money into the domestic industry, preferring to pick and choose from a much larger pool of managers a short flight away in New York, Boston and elsewhere.

For the C$170.1 billion Canadian Pension Plan Investment Board, almost all of the C$10.4 billion it gives to external public market managers goes to non-Canadian hedge funds such as Bridgewater Associates, Fortress Investment Group LLC (FIG.N: Quote), and Bill Ackman's Pershing Square Capital.

Quebec's C$159 billion Caisse de depot et placement pension fund and the C$117.1 billion Ontario Teachers' Pension Plan have also traditionally looked abroad for their hedge fund exposure.   Continued...