The Canadian capital markets have been extremely vibrant over the past few years, as global economic growth has led the international investment community to 'discover' the investment potential of Canada.
In particular, our resource- and commodity- related equities have been in demand, but so too have our government bonds and our Canadian dollar - affectionately known as the 'loonie'.
It may surprise some to know that the Toronto Stock Exchange is the seventh largest exchange in the world with over $1.5 trillion in market capitalisation. It boasts more than 50 per cent of the world's listed mining companies and has the highest number of oil and gas listings globally. That said, well over 50 per cent of our market cap is not resource-based, offering hedge fund managers the benefits of diversification into sectors such as financial services, communicators and technology. Additionally, more than 50 per cent of our companies are considered small to mid cap (C$50-C$500 million in size), offering a good trade-off between liquidity and informational inefficiencies to exploit.
Our debt and currency markets have also been in demand. The Montreal Exchange provides equity, debt, interest rate and index derivatives as means to both leverage and hedge investment activity. There's certainly a great deal of life north of the 49th parallel. The Canadian hedge fund market has grown dramatically over the past five years. From barely a few dozen single manager funds in 1999, there are now some 150 hedge funds in operation, and capital has swelled from C$1.3 billion to more than C$6 billion during that time. There is a broad range of strategies available, but the bulk of the capital is opportunistic in nature, with long/short equity strategies being the dominant category.
In general, performance has been very strong. In addition, there are a number of large funds of funds operators in Canada that each manage in excess of $1 billion - much of this institutionally focused. In aggregate, there is well over C$15 billion allocated to hedge funds in Canada. The majority of hedge fund capital is managed from Toronto. All the major Canadian banks offer prime brokerage services, and there is a very deep and reliable group of service providers including major accounting, legal and administration organisations. Canada has a sound legal and regulatory infrastructure with registration required for all managers. Securities regulation however is somewhat burdened by a provincial (rather than federal) system. The Ontario Securities Commission is considered the leading regulatory watchdog in the country. The Canadian hedge fund market is poised for tremendous growth going forward.
Alternatives generally make up only a small percentage of private client portfolios, but that is starting to change. International investors, in search of exposure to new sources of alpha and beta, have been markedly increasing their exposure to Canadian hedge funds, albeit from a low starting base. All of this comes at an opportune time as more talent enters the industry and substantial capacity is available.
Author - James L. McGovern, President of Arrow Hedge Partners Inc and Chairman of AIMA Canada