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Hedge funds for the masses

Financial Post – Monday April 8, 2002

By Barry Critchley – Membership fees for these exclusive clubs drastically reduced

Bringing hedge funds to the retail investor — supposedly the next big thing in investing — continues to move in fits and starts.

Previously, hedge funds were the purview of the rich, given that most of them tended to be sold via private placement, a way of distributing securities that until recently required an outlay of $150,000 in some provinces.

Of late, there have been a number of offerings where the minimum investment has been reduced considerably. If nothing else, the documents filed to allow the issues to take place are a primer in hedge fund terminology.

The next big thing in investing does have its critics: last summer, Barton Biggs, the legendary strategist at Morgan Stanley Dean Witter, said the following: “The hedge fund mania that now grips the U.S. and Europe is rapidly assuming all the classic characteristics of a bubble,” adding that the bubble “could rattle some cages in the financial world.”

While Biggs didn’t refer to Canada, here’s a run-down of recent hedge fund deals.

· Last fall, Citibank GPR Hedge Fund filed an offering that promised investors a return of principal at the end of 10 years, plus the upside from an investment in a couple of dozen hedge funds.

Earlier this year, the issuer closed with $35-million in proceeds. Recently it announced that it’s back for more, though as part of the effort to garner more interest it has modified some of the original terms and conditions.

Those new terms and conditions will apply to those investors who participated the first time round.

· Citibank’s deal was followed by Casurina Performance Fund, an offering that will be managed by Front Street Capital. On that transaction, investors are required to invest at least $2,000 via the purchase of 100 units at $20 a unit.

The fund has a term of 10 years and the investment manager plans to provide unitholders with returns higher than those available from the major North American equity indexes.

The manager will generate those returns through a long/short strategy — meaning that it will own certain equity and debt securities and be short, under strict limits, debt and equity securities.

National Bank Financial is lead manager on the transaction that hasn’t yet gone final.

· Less successful was Advantage Advisers Multi-Sector Trust.

This past week, the issue, which was organized and promoted by CIBC World Markets and which was filed last December, was pulled from the markets.

The original plan called for investors to outlay US$2,500 by purchasing 100 units at US$25 per unit.

A slew of dealers, including CIBC World Markets, TD Securities, National Bank Financial and some independent firms, planned to sell the units. Of more significance was that BMO Nesbitt Burns, RBC Dominion Securities and Scotia Capital weren’t in the deal.

Those bank-owned firms chose not to participate because, in part, the deal had CIBC World Markets and/or related entities all over it. “CIBC World Markets, the manager, is an affiliate of the custodian, the investment adviser and the promoter,” said the prospectus.

The various links were so extensive the prospectus devoted two pages to potential conflicts of interest. CIBC controlled Advantage Advisers, the managing member of the investment advisor.

At least one source indicated that the product was pulled, in part, “because their own deal was poorly constructed from the start and never earned the confidence of their brokers at Wood Gundy.”

· Enter iPerform Strategic Partners Hedge Fund, which last month filed a preliminary prospectus for a fund that has a minimum $5,000 entry price for retail investors.

This fund, which has a term of six years, offers unitholders access to four investment advisors: Hillsdale Investment Management (Toronto); Sprott Asset Management (Toronto); Global Asset Management (USA) Inc. (New York) and Gabelli Securities International Ltd. (New York.)

Of particular interest is that CIBC World Markets — which apparently became a syndicate member late in the piece — is a co-lead manager and top right in the syndicate. For obvious reasons, CIBC World Markets couldn’t be on the top left for this deal given that it had its own deal in the market at the same time.

Instead the deal is being led by the Calgary office of Canaccord Capital, the largest independent firm operating in Canada. There are nine other firms in the syndicate. (BMO Nesbitt Burns, RBC Dominion Securities and Scotia Capital aren’t in the syndicate.)

Road shows start this week and the plan is to go final at month-end, though the timing depends on the receipt of regulatory approval.

iPerform said the choice of lead and co-lead manager was “a three-way decision. Both Canaccord and CIBC and us agreed that while they would work together, Canaccord would lead the transaction. We were the most comfortable with having Canaccord and CIBC as co-lead managers with Canaccord running the books.”