Canada's IDA Expresses Hedge Fund Concerns

by Philip Morton, Investors Offshore.com

31 May 2005

In a recently published report, the Investment Dealers Association of Canada (IDA) expressed concerns regarding the rapid increase in the popularity of hedge funds, and the applicability of current securities law to the more loosely regulated investment vehicles.

The IDA explained that:

"Unlike mutual funds, hedge funds operate under exemptions from securities distribution laws. Theoretically, that limits their investor base to the sophisticated and affluent investors that are capable of protecting their own interests. However, there has been a widespread move into retail distribution of hedge funds or hedge fund related products in Canada and elsewhere."

"The attraction for retail investors resulted from the bear market, which prompted many investors to look for investment managers who know when and where to invest, and work within a format that allowed them to do so. Relatively good returns, meaning better performance than the market, have become less important than absolute returns (i.e., not losing money, especially when the market falls)."

"Hedge funds are marketed as the answer: vehicles that have provided generous returns during all stock market environments and thus as excellent diversifiers to an all equity portfolio. The result has been explosive growth in hedge fund assets under management in Canada. One of the most popular retail products has been principal protected notes (PPNs), which now account for approximately 50% of the $14.1 billion of hedge fund assets in Canada."

The Association went on to explain that expansion into retail markets has heightened concerns about several aspects of hedge fund products, including:

• The applicability of securities laws exemptions used;
• Marketing practices by both hedge funds and dealers;
• Conflicts of interest;
• High levels of fees and charges, some of them not transparent;
• The ability of hedge fund managers to meet expectations raised by their marketing; and
• The lack of disclosure of hedge fund operations and financial affairs.

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