Why is the hedge fund industry in Canada not as vibrant as the US?

[valueinvestor]

It's strange because the requirements to start a hedge fund in Canada/US  does not seem too strenuous, where the US is slightly easier because you do not have to be a qualified investment manager when your AUM is small and you only have a few number of investors.

 

This is from speaking to lawyers and reading source/reliable materials (from OSC, SEC, AIMA, etc.) because someday in the next two to five years (once I get my CIM or CFA), I would like to be running my own partnership.

 

With all this, the question still reverberates at the back of my head that why hedge funds are not as prominent here, as in the US. One lawyer (though she does not practice securities law) told me that Canadian Hedge Funds are not allowed to invest in US equities because of some odd reason, and because she could not give me a reason, I'm dismissing that claim.

 

Any insight that can be provided would be greatly appreciated because it is unsettling to see this. Thank you.

[nodnub]

It's strange because the requirements to start a hedge fund in Canada/US  does not seem too strenuous, where the US is slightly easier because you do not have to be a qualified investment manager when your AUM is small and you only have a few number of investors.

 

This is from speaking to lawyers and reading source/reliable materials (from OSC, SEC, AIMA, etc.) because someday in the next two to five years (once I get my CIM or CFA), I would like to be running my own partnership.

 

With all this, the question still reverberates at the back of my head that why hedge funds are not as prominent here, as in the US. One lawyer (though she does not practice securities law) told me that Canadian Hedge Funds are not allowed to invest in US equities because of some odd reason, and because she could not give me a reason, I'm dismissing that claim.

 

Any insight that can be provided would be greatly appreciated because it is unsettling to see this. Thank you.

 

My guess, is a combination of factors.

 

Smaller population (1/10th of US)

Population not highly concentrated near financial centers (relative to U.S.)

Slightly less wealth concentration at the top (relative to U.S.) means smaller pool of potential hedge fund investors

Lack of financial education among investors (eg. many Canadians still hold multi-million $ portfolios full of Mutual funds paying 2-3% MERs)

Perhaps a more conservative attitude towards investing (on average, among wealthy Canadian investors).

Perhaps lower risk-taking in general in Canadian culture?

Lack of flagship Canadian hedge funds with amazing results to build local hype for hedge funds?

 

curious to hear thoughts from other people here.

 

 

[Gregmal]

Well, this definitely isnt politically correct to say. It is definitely a broad scale, sweeping generalization, but from my own experience I've found the average Canadian to be far more intelligent and fiscally responsible than the average American. Americans love to have everyone else do everything for them. And paying someone else to do it makes a lot of people feel special.

[rb]

I'm sorry Gregmal, but I don't think that politically incorrect is the right word. Ignorant may be more correct of the above post.

 

Firstly, way more people live close to financial centres in Canada compared to the US.

 

Secondly, what's the difference between 2-3% MER and 2 and 20?

 

Addressing the original question - what exactly is a hedge fund? Hedge funds run the entire spectrum, anything can be defined as a hedge fund. I think the only differentiation is whether the fund charges a performance fee or not.

 

Reasons why you may see a lot of US style hedge funds is that we have a lot of family offices in Canada. So wealthy families have in house hedge funds as opposed to farming that stuff out. This way they save a lot on fees.

 

There is definitely a more conservative approach to investing in Canada as well - good luck trying to sell a junk bond issue up here. But as funds run the gamut it doesn't translate in an attitude against HF. However being an HF (whatever that means) doesn't make you a superior investment by default. What Canadian conservatism does is that it won't allocate assets to HF as a class as it does in the US where you'll have a consultant that says you need to have X% in hedge funds and the clients will dutifully oblige (I'm aware that that statement may be a bit ignorant on my end as well).

 

To the OP, stop thinking of things in terms of labels and norms such as hedge fund and 2 and 20. Think of it from the side of a business. Provide a good service, charge a fair price for it.

[valueinvestor]

I'm sorry Gregmal, but I don't think that politically incorrect is the right word. Ignorant may be more correct of the above post.

 

Firstly, way more people live close to financial centres in Canada compared to the US.

 

Secondly, what's the difference between 2-3% MER and 2 and 20?

 

Addressing the original question - what exactly is a hedge fund? Hedge funds run the entire spectrum, anything can be defined as a hedge fund. I think the only differentiation is whether the fund charges a performance fee or not.

 

Reasons why you may see a lot of US style hedge funds is that we have a lot of family offices in Canada. So wealthy families have in house hedge funds as opposed to farming that stuff out. This way they save a lot on fees.

 

There is definitely a more conservative approach to investing in Canada as well - good luck trying to sell a junk bond issue up here. But as funds run the gamut it doesn't translate in an attitude against HF. However being an HF (whatever that means) doesn't make you a superior investment by default. What Canadian conservatism does is that it won't allocate assets to HF as a class as it does in the US where you'll have a consultant that says you need to have X% in hedge funds and the clients will dutifully oblige (I'm aware that that statement may be a bit ignorant on my end as well).

 

To the OP, stop thinking of things in terms of labels and norms such as hedge fund and 2 and 20. Think of it from the side of a business. Provide a good service, charge a fair price for it.

 

Which is exactly why it is not deterring me from starting one. As you said, if you provide a good service, you charge a fair price. You are right that hedge fund is a broad term, almost similar to the term "literally." As for thinking from a business perspective, it is nice to have perspective on the industry and know the nuances. That way you can learn the needs and wants, and hopefully provide value. 

 

Never knew that family offices were popular in Canada, then again, why would family offices advertise themselves. However if a manager is that good to be hired by a family, why not set off on their own? Not that everything is driven by compensation, and the need to have "more," but it is unusual in a capitalistic society. One would think that if their returns are good, they would open up shop and have more than one family as a client. However, the more plausible case is that I misunderstood you, so if you can provide clarification... it would be appreciated.

 

 

 

My guess, is a combination of factors.

 

Smaller population (1/10th of US)

Population not highly concentrated near financial centers (relative to U.S.)

Slightly less wealth concentration at the top (relative to U.S.) means smaller pool of potential hedge fund investors

Lack of financial education among investors (eg. many Canadians still hold multi-million $ portfolios full of Mutual funds paying 2-3% MERs)

Perhaps a more conservative attitude towards investing (on average, among wealthy Canadian investors).

Perhaps lower risk-taking in general in Canadian culture?

Lack of flagship Canadian hedge funds with amazing results to build local hype for hedge funds?

 

curious to hear thoughts from other people here.

 

 

Certainly see where you are going there, and definitely can attest to your point that there is a difference in culture.

 

[rb]

Which is exactly why it is not deterring me from starting one. As you said, if you provide a good service, you charge a fair price. You are right that hedge fund is a broad term, almost similar to the term "literally." As for thinking from a business perspective, it is nice to have perspective on the industry and know the nuances. That way you can learn the needs and wants, and hopefully provide value. 

 

Never knew that family offices were popular in Canada, then again, why would family offices advertise themselves. However if a manager is that good to be hired by a family, why not set off on their own? Not that everything is driven by compensation, and the need to have "more," but it is unusual in a capitalistic society. One would think that if their returns are good, they would open up shop and have more than one family as a client. However, the more plausible case is that I misunderstood you, so if you can provide clarification... it would be appreciated.

Oh, family offices are very popular in Canada. And as you say, they have no incentive to advertise themselves. Also there are families that band together and form a family office. The reason why it's hard to branch out and service family offices is the same reason that family offices exist in the first place. A need for a highly customized service that go way beyond a "Dear Partner" letter.

 

One thing to note in Canada especially in the high net worth and ultra net worth segments is that performance is not all that matters. They care about making money but they care more about how you make that money. Performance against a benchmark is not very important as opposed to performance towards what goals they may have.

 

Again this comes to service. Don't think that you can make an extra 20 bp or 100 bp or whatever and clients are gonna come flocking to you. Even if some do, that's probably not the clients you want to have. My best advice is look at the clients you can attract and design a service for them. If you want to pursue a general market strategy it's not likely to be successful.

[Gregmal]

I'm sorry Gregmal, but I don't think that politically incorrect is the right word. Ignorant may be more correct of the above post.

 

Firstly, way more people live close to financial centres in Canada compared to the US.

 

Secondly, what's the difference between 2-3% MER and 2 and 20?

 

Addressing the original question - what exactly is a hedge fund? Hedge funds run the entire spectrum, anything can be defined as a hedge fund. I think the only differentiation is whether the fund charges a performance fee or not.

 

Reasons why you may see a lot of US style hedge funds is that we have a lot of family offices in Canada. So wealthy families have in house hedge funds as opposed to farming that stuff out. This way they save a lot on fees.

 

There is definitely a more conservative approach to investing in Canada as well - good luck trying to sell a junk bond issue up here. But as funds run the gamut it doesn't translate in an attitude against HF. However being an HF (whatever that means) doesn't make you a superior investment by default. What Canadian conservatism does is that it won't allocate assets to HF as a class as it does in the US where you'll have a consultant that says you need to have X% in hedge funds and the clients will dutifully oblige (I'm aware that that statement may be a bit ignorant on my end as well).

 

To the OP, stop thinking of things in terms of labels and norms such as hedge fund and 2 and 20. Think of it from the side of a business. Provide a good service, charge a fair price for it.

 

Politically correct, ignorant, whatever, all are the labelled cost of having an opinion these days. Opinions are not fact, they can be right or wrong, nonetheless its just an outside observation the I have found to have some merit, IMO. There's an attitude prevalent amongst many Americans in today's day(not just relating to investments btw) and age which I best describe as "do it for me". I have found, again solely from my own experience, the Canadian mentality is different. I guess if we call it "Canadian conservatism" its more acceptable. Hedge fund I guess can be defined differently, although I suppose my reference was more in relation to broader investment management. From my little perch here in America, I have no problem saying that I've found Canadians to be savvier and more financially cognizant than my fellow Americans. If I offend anyone north of the boarder with this sweeping generalization, I apologize.

[rb]

Politically correct, ignorant, whatever, all are the labelled cost of having an opinion these days. Opinions are not fact, they can be right or wrong, nonetheless its just an outside observation the I have found to have some merit, IMO. There's an attitude prevalent amongst many Americans in today's day(not just relating to investments btw) and age which I best describe as "do it for me". I have found, again solely from my own experience, the Canadian mentality is different. I guess if we call it "Canadian conservatism" its more acceptable. Hedge fund I guess can be defined differently, although I suppose my reference was more in relation to broader investment management. From my little perch here in America, I have no problem saying that I've found Canadians to be savvier and more financially cognizant than my fellow Americans. If I offend anyone north of the boarder with this sweeping generalization, I apologize.

Gregmal I'm sorry if you misunderstood me. My comment about ignorance was not directed at your opinion but to the opinion of the poster before you. I don't think that there's anything wrong about what you wrote in your post.

 

In terms of opinions, yes they are not fact. But they should be based on facts otherwise one is just talking out of ones ass and the respective opinion is an ignorant one - ignorant of the facts. i.e Population not highly concentrated near financial centre - when 20% of population lives in the Toronto area alone -a financial centre. Labeling it such is not societal tyranny. It is simply correct.

 

 

[tng]

In the old days when regulation was looser, well connected people made money with insider trading. I think the U.S. just had a longer history of ultra wealthy families with deep political connections that created a culture of for hedge funds. If something like the 2/20 structure never existed, it would be extremely difficult to convince people to pay you that much today.

 

It's normal for very rich families to fund their friends and family. I get the sense that there are a lot of kids who get to play hedge fund manager with daddy's money because getting below average returns with a small slice of the family wealth isn't a big deal. Sometimes you have two wealthy groups buying favors from each other by funding their kid's funds. You have a few guys who are very good at it, but the vast majority of hedge funds won't perform well, but new ones keep springing up. You wonder "who are these idiots who keep putting money into hedge funds that have no track record?". It's not about the performance. Some rich people buy their kids very expensive cars to let them feel special. Others suffer a little under-performance on a pool of money so their kid can feel special. It's not the worst thing in to world to do to a rich kid because it might be the only way to get him to work.

 

Also, because the U.S. market is simply bigger and there is more wealth there, I think if there is a hedge fund manager with legitimate superstar potential, there is a good chance he would move to the U.S. because it is easier for him to acquire funding there.

[ulysses02]

Great replies so far. Thanks for the post.

 

To ask the question a different way, assuming views on conservatism, subpar financial education, more family offices per capita (data?) may be considered subjective, are there any factual reasons why Canadian HF isn't as vibrant as US? i.e. regulatory hurdles to setting up or tax reasons? I was listening to a Mohnish Pabrai talk the other day and he made a comment about the merits of not having to be SEC-registered (in terms of ability to focus on finding bargains, lower costs etc). Perhaps similar exemptions are unavailable in Canada?