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Hedge fund manager makes a surprising no-return-no-management fee pledge

by Wayne Cheveldayoff, 2004-10-14

The proliferation of hedge fund managers in Canada in recent years has been triggered in large part by the lucrative fees involved.

So it was more than a little surprising to see Pro-Hedge Funds Inc. announce last month that it will not charge fees on its new Capital Preservation Fund in any quarter that the fund generates a loss for investors.

This no-return-no-management fee pledge is definitely a first in the fund industry in Canada.

Why is Pro-Hedge doing this? It is obvious that the firm is trying to make an impact in the investment marketplace and catch the attention of investment advisors and accredited investors who have many offerings to choose from.

But Ravi Ramaswamy, Pro-Hedge vice president, maintains the decision was aimed at more than this. He explained that Pro-Hedge believes strongly in the future performance of the fund and that one way to demonstrate that it stands 100 per cent behind its product is “to put our money where our mouth is.”

This confidence stems mainly from the underlying Ontario Partners Fund’s nine-year track record of 13-per-cent average annual returns with only five down months.

Here is how the new fund is structured. Canadian accredited investors buy units of Pro-Hedge’s Capital Preservation Fund, which is licenced to be offered in Canada and in amounts small enough (as low as $5,000) to be workable.

The Capital Preservation Fund then invests the money in the Ontario Partners Fund, a hedge fund that is normally only available with a minimum US$1 million investment to U.S. investors. (The “Ontario” part of the underlying fund’s name refers to a street in Chicago where the manager, Mansur Capital Corporation, is located.)

Canadian investors can access the investment expertise of Mansur Capital only through Pro-Hedge funds.

In effect, Pro-Hedge provides access to Mansur and re-packages it into bite-sized portions for Canadians.

For this, Pro-Hedge gets a fee of 1.5 per cent a year, or 0.375 per cent per quarter, plus another 10 per cent of any positive return generated by the Ontario Partners Fund. The 10-per-cent incentive fee is customary in the hedge-fund sector.

Those are the fees that Pro-Hedge is pledging to give up if investors in the Capital Preservation Fund experience a down quarter.

What is not being given up, however, are the fees being charged by Mansur Capital, which amount to another 1 per cent annually, plus another 10-per-cent of any gains.

Another fee that won’t get cancelled is the swap fee of 0.5 per cent per year that Pro-Hedge is paying to make the Capital Preservation Fund Canadian content for registered plans such as RRSPs and fully currency hedged (meaning the ups and downs of the Canadian dollar exchange rate will not affect returns).

In total, therefore, Canadian investors in the Capital Preservation Fund will be paying an annual fee of 3 per cent, plus performance fees of 20 per cent on any gains. This may be a touch on the high side but not really out of line with what Canadian investors have been charged on their hedge-fund investments.

(The fees may not end there. The Capital Preservation Fund has a fee of 3 per cent if the investment is withdrawn within 90 days and for any amount sold by advisors on a back-load basis, there would be additional redemption fees if withdrawn within the first 6 years starting at 6 per cent in the first year and dropping to 1 per cent in the sixth.)

What would the funds be invested in? Pro-Hedge makes the point that none of the money in the Ontario Partners Fund (currently amounting to US$130 million) will be invested in long or short equity positions. This makes it a true alternative to equity mutual funds and its performance should bear little resemblance to that of the stock market.

Instead, the money will be invested in eight arbitrage styles, involving such investment areas as structured notes, convertible bonds, distressed securities, foreign exchange and so on.

Pro-Hedge’s promotional material on the new fund (available at illustrates that downside risk is minimal in a number of ways. It points out that 107 months out of 112 have been positive. Also, had the fund been in existence during the October 1997 Asian market crisis, it would have returned 1.06 per cent during a period when the S&P/TSX Composite Index fell 2.8 per cent. Similarly, during the September 2001 terrorist attacks on the United States, the fund would have fallen only 0.02 per cent when stocks fell 7.6 per cent.

Another measure of volatility of funds, namely standard deviation, is shown to be 2.32 per cent for Pro-Hedge’s new fund versus 16.9 per cent for the S&P/TSX Composite Index and 4.78 per cent for the S&P500 Index from May 1995 to August 2000.

While the targeted 9-12-per cent annual return may seem tempting to some, the new Capital Preservation Fund is not for everyone. Under securities rules, accredited investors (generally individuals with $1 million in financial assets or with pre-tax incomes of at least $200,000 in the past two years, exact rules vary from province to province) can invest as low as $5,000. But others normally would have to come up with a larger amount – $150,000 for residents of Ontario, Quebec, Nova Scotia, Saskatchewan, North West Territories and Nunavut, $100,000 for those in Newfoundland, and $97,000 for residents of British Columbia, New Brunswick, Manitoba, Alberta, Yukon and Prince Edward Island.

Wayne Cheveldayoff is a former investment advisor and professional financial planner. He is currently specializing in financial communications and investor relations at Wertheim + Co. in Toronto. His columns are archived at and he can be contacted at

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©2004 Wayne Cheveldayoff