Buoyant Canada attracts growing global interest

Established in 1999, Toronto-based Arrow Hedge Partners manages a range of investment strategies via its four funds of funds and 15 single-manager vehicles. Despite the market turbulence, last year was a good one for the firm from a business standpoint as it passed CAD1bn in assets.

In general its funds held up well during a particularly tumultuous period for capital markets worldwide. Alongside its multistrategy investments, Arrow Hedge's global special opportunities vehicle, a long-bias hybrid fund with hedge and private equity-type investments including pre-IPO stocks, leveraged loan market and distressed CDO opportunities, performed particularly well.

The firm has also added new funds to its roster. Extending its work on early-stage managers, its forte, in February Arrow Hedge launched an incubation fund along with partner Marret Asset Management. The fund, the first of its kind in Canada, raised CAD150m mainly from institutional investors and high net worth individuals. It will have a long/short equity bias and target both early-stage managers and new funds from existing firms.

It has also introduced the Arrow Maple Leaf Fund, which as its name suggests invests in Canadian hedge funds. Most of its underlying managers have been bullish about the country's energy, natural resources and event-driven sectors and benefited from their strong performance.

Arrow Hedge is working to expand the fund's roster of managers to as many as 20. The Maple Leaf Fund, which currently has CAD25m in assets, is being marketed internationally with a CAD200m fund-raising target and is attracting capital inflows from investors in Europe and Asia. Arrow Hedge has also launched several Canadian single-manager long/short funds, two of which exploit small- to mid-cap stocks that are not well covered by sell-side analysts.

Canada's equity market and financial institutions have not been immune to the global credit crunch and liquidity crisis, but damage has not been severe due to relatively low exposure to the US sub-prime market - a factor also underpinning the resilience of the Canadian dollar compared with its US counterpart.

Some Canadian stocks, particularly in resources and commodities, have attracted international investors in droves. For example, Potash Corporation of Saskatchewan and Research in Motion, the company behind the Blackberry communications system, have buoyed the performance of local managers and also had a positive impact globally. As long as demand for commodities keeps rising and supply issues persist, the TSX benchmark can continue to hold up, but until banks loosen their purse strings and begin extending credit lines again, Arrow Hedge will continue to hold a cautious portfolio stance.

The firm also expects capital markets to remain highly volatile for the foreseeable future, given the global economic and geopolitical turbulence, and has positioned its portfolio to take advantage of volatility-related plays. It is also targeting the distressed credit area, where it sees tremendous investment opportunities.

With just CAD40bn invested in hedge funds, Canada remains a miniscule market for the industry relative to the total of more than USD2trn invested in such vehicles worldwide. However, the country's political stability, abundant natural resources and proximity to the world's largest market, coupled with sound regulation and a wide array of service providers, all bode well for local managers.

 

Mark Purdy is managing director and chief investment officer with Arrow Hedge Partners in Toronto

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