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Hillsdale Hedged Funds Performance for October 2003

Canadian markets as a whole experienced a strong rally in October after a short pause in the previous month. The S&P/TSX rose 4.8%, led by large gains in gold (up 7.5%) and financial services (ahead 6.9%). The worst performing sector, health care, fell 8.6%, mainly due to Biovail's large decline. Energy stocks experienced a modest correction last month, continuing a trend of relative underperformance in this bull market. The S&P/TSX Small Cap Index continues to outperform the larger Composite.

One of the key value-added services provided by Hillsdale is an ongoing review of the factors that drive market returns and, consequently, our funds. This attribution offers valuable insight into market "streaks" and longer term trends. During October, Canadian markets favoured stocks that experienced positive price momentum in the previous six to twelve months, as well as those with positive revisions in analysts' earnings estimates. U.S. investors shower similar preferences but were also interested in actively traded volatile names.

U.S. markets also advanced on good economic news, with the S&P 500 up 5.8% in October. The NASDAQ Composite rose 8.1% and the Russell 2000 small caps returned 8.3%. Large gains came from consumer discretionary and materials, while energy, health care and utilities underperformed. Technology stocks continued their trend of strong performance, with the NASDAQ Composite up almost 50% year-to-date.

The Hillsdale Canadian Aggressive Hedged Equity Fund gained 9.3% for the month versus 4.8% for the S&P/TSX. The long portfolio returned almost 8%, led by large gains in materials stocks Agrium and Falconbridge. Other double digit increases came from GSI Lumonics and Rogers Wireless. The short portfolio declined 2%, where gains in health care positions, namely Biovail and ID Biomedical were not enough to offset losses in materials stocks. Year to date, the fund is up 20.4% compared to 19.4% for the S&P/TSX. The current target allocation is $1.55 long and $1.00 short. Within our risk management framework, we have been actively rebalancing to maintain a mid-beta target.

The Hillsdale Canadian Performance Equity Fund, our long only strategy, gained 9.2% compared to 7.3% for the S&P/TSX Small Cap Index. Winners outpaced losers by a four to one margin, with large gains coming from technology, namely Hip Interactive and Sierra Wireless, and health care positions, including Extendicare and VSM MedTech. Losers were led by Sino-Forest and Zargon Oil & Gas. Year to date, the fund is ahead 35.9% compared to 25.0% for the S&P/TSX Small Cap Index. Despite this excellent run, the fund remains at reasonable valuations, trading at 15 times earnings versus 18 times for the index, and with ROE of 16% versus 12% for the index.

The Hillsdale Canadian Market Neutral Equity Fund returned 3.5% for the month. The long portfolio rose almost 9%, while the short portfolio declined more than 5%. The fund continues to be industry neutral, with positive contributions coming from energy, gold and consumer discretionary, and losses arising from materials. The fund continues to track within its risk budget with current volatility below 6%. The fund is up 2.9% year to date.

The Hillsdale U.S. Performance Equity Fund, our long only strategy, returned 8.4% versus 5.8% for the S&P 500. Winners outpaced losers by more than a four to one margin. Large gains came from materials and technology stocks, while the fund experienced modest losses from consumer discretionary positions. Year to date, the fund is up 31.8% compared to 21.2% for the S&P 500.

The Hillsdale U.S. Aggressive Hedged Equity Fund returned 4.9% for the month. The long portfolio posted a gain of almost 9%, led by large gains in materials and industrials positions. The short portfolio fell almost 8% with gains in health care and consumer staples positions not large enough to offset losses in technology stocks. The current target allocation has been reduced to $1.40 long and $0.70 short reflecting renewed volatility in US stocks and increased betas particularly on the short side. Year to date, the fund is ahead 19.9% versus 21.2% for the S&P 500.

We have recently closed the Hillsdale U.S. Market Neutral Fund our longest standing 'hedged' track record. While the fund has preserved capital through some very difficult times, its return target of 8% to 10% is below the level of appreciation that we have seen in the Canadian dollar versus the US thus removing its return potential for Canadian based investors. The strategy is still active and does remain available to US investors as a separate account. On a going forward basis, Canadian investors with capital preservation needs will be better served in our Canadian Market Neutral Equity Fund while those who wished to slightly increase their market exposure and remain in US currency have moved to the US Aggressive Hedged.

As always, please feel free to contact us if you have any questions or concerns with your portfolios.

Regards,
Chris Guthrie and Arun Kaul