By Amran Abocar
Reuters
Friday, February 11, 2005
TORONTO, Feb 11 (Reuters) - It's not often that the hushed world of hedge funds is splashed all over the front pages of newspapers.
Adrian Mastracci, investment counsel at Vancouver’s ‘fee-only’ KCM Wealth Management, says, "The fact that you can't redeem doesn't put the best light on it. Those investors who have put money into this thing will not get a good feeling.”
But the unfolding drama around a Canadian company has become the talk of the street and offered a sneak peek into the rarefied world of alternative asset management, land of the high net worth investor.
The tale centers on Portus Alternative Asset Management, a Toronto firm with about C$800 million ($644 million) in assets under management and 26,000 clients.
Canadian regulators have slapped a temporary order on the firm, forcing it to stop taking in new funds and opening new accounts. Portus, a fast-growing outfit that's become renowned on the street for its aggressive marketing, had been raking in C$20 million a week in new funds.
Regulators are now probing whether it violated compliance rules, the company has halted redemptions from its managed accounts and there is intense curiosity about just who exactly is backing its principal-protected notes.
"There's a real concern that these guys are going to leave a smell on the Canadian alternative investment industry," said one industry player who asked not be identified.
The probe has also highlighted the growth of guaranteed notes, backed by either bonds or big banks. The structured products market is worth between C$3 billion to C$5 billion annually in sales, analysts estimate.
Annual sales from the principal-protected note business, which is where Portus comes in, may be as high as C$2 billion in Canada.
"If you were to look for a market segment in the structured product universe that was growing faster than anything else, this would be it," said the industry player.
"Principal-protected notes have been THE place to be because they are in essence exempt from regulatory scrutiny."
At the heart of the matter, Portus allegedly contravened record-keeping and know-your-client regulations. Those rules say hedge funds can sell only to accredited investors -- people wealthy enough to handle the loss of their principal if things go wrong.
Regulators want to know whether all of Portus's clients fit that category or if some were small retail investors.
"LACK OF CLARITY"
Meanwhile, Portus, which means safe harbor in Latin, and sells funds made up of hedge funds, put the brakes on redemptions and urged investors to stay the course.
"The fact that you can't redeem doesn't put the best light on it," said Adrian Mastracci, president of KCM Wealth Management. "Those investors who have put money into this thing will not get a good feeling."
Portus did not return calls but issued a statement saying the money was safe and investors would get their full principal back, plus any gains, if they held on to maturity.
"The only way investors face any loss of their principal is by withdrawing funds from their investment account prior to the maturity date of the bank note," it said. "This bank note is issued and 100 percent backed by one of the world's major financial institutions."
And therein lies another issue.
At least one regulator -- and there are several across Canada probing Portus -- says that it inappropriately creates the impression that the securities are guaranteed by a bank.
Whether they are or not, Portus is not obliged to reveal who the backer is to investors -- although most hedge funds do that anyway -- and the institution itself has not come forward. Reports have said it is the Canadian arm of French bank Societe Generale (SOGN.PA: Quote, Profile, Research) .
The bank did not immediately return calls for comment.
"Their (Portus's) lack of clarity on the guarantee portion is really a concern," said a Toronto-based investment advisor.
Industry watchers expect the OSC, Canada' main regulatory watchdog, to busy itself with the hedge-fund sector in coming months.
"This won't just be a rap-rap on the knuckles," said Conor Bill, managing director at Mt. Auburn Capital.
"This gives them the wedge with which to examine a business that has been growing extraordinarily quickly in this country without any oversight whatsoever."
A hearing to consider extending the OSC's trade order on Portus is slated for Feb. 17. The regulator expanded the temporary order on Friday, banning Portus from paying out funds, trading in securities, and preventing its managing director from trading.
($1=$1.25 Canadian)
|
