The annual hedge fund industry gathering overlooking Niagara Falls is a modestly cheery affair this year, at least when it comes to the outlook for the business of hedge funds in Canada. Just don't ask about the markets.
The general consensus of the fund managers taking the podium is that markets are in for a rough ride, especially on the equity side. Some expect short-term volatility and range trading. Others appearing at this year's World Alternative Investment Summit Canada expect a bull run followed by a big slump. But pretty much nobody sees clear sailing.
However, in that environment, the hope in the industry is that more and more investors will move out of straight mutual funds to look for more consistent returns that aren't tied to the daily ups and downs of the Dow Jones Industrial Average. That's what hedge funds are supposed to provide.
"We think that there's a huge demand for investors for non-correlated assets," said Toreigh Stuart, chief executive officer at MAN Investments Canada, who said his firm is coming off its top year.
And adding to the general feeling of optimism is a lack of blowups in the hedge fund world in Canada or around the world of late. But the shadow of some big failures still hangs over the world of alternative investment management.
There were the out and out frauds, such as Norshield in Canada and the Madoff affair in the U.S. But aside from the alleged criminals, many firms just didn't deliver on the promise of steady uncorrelated returns when markets were down. Instead of providing those regular monthly gains, it turned out many fund managers were just mutual funds with a lot of leverage, and they got hammered.
"A lot of investors didn't pass the test in 2008 and 2009," said James McGovern, chief executive officer of Arrow Hedge Partners in Toronto, a firm that helps investors place money in a basket of hedge funds.
Those stigmas still dog the industry, making it "tricky" to predict a totally sunny outlook for growth in the hedge fund business in Canada, Mr. McGovern told the group assembled in Niagara Falls.
The outlook gets a lot cloudier when it comes to markets and the economy.
With weak data and bouncy markets, it's prudent to keep net exposure to markets low, said Colin Stewart, a portfolio manager and co-founder of JCClark. Instead, his firm is trying to find relative value plays such as betting on big-cap blue chip stocks, while shorting lower quality stocks, to hopefully profit when a valuation gap between the two closes.
"Long high quality short low quality is a theme we're really focused on," said Mr. Stewart.
By contrast, bond manager Barry Allan of Marret Asset Management, is feeling good about the outlook for markets, just not out past much more than a year.
"Our longer term view is quite dire but in the next 15 to 18 months I'm actually quite bullish, Mr. Allan said, pointing to stimulus programs that will push growth on the back of government borrowing and spending.
However, when investors run out of patience with governments and stop spending, it will be "extremely painful for markets" as a "switch will go off" and demand will disappear for bonds issued by indebted governments like the United States and the United Kingdom.
Mr. Allan said he believes that bonds remain the place to be as the global deleveraging trend (outside of governments) plays out. When companies are borrowing and expanding to increase sales, that tends to benefit shareholders at the expense of lenders. But when companies are holding off on expansion and building up cash as they are now, that increases credit quality and benefits bondholders. It just doesn't do much for equity returns.
That deleveraging trend could go on for years, he argued. And share prices will suffer, to the extent that there's a "high probability" that stock markets could trade below where they were in the worst of the crisis.
"Investment expectations have to come dramatically down," Mr. Allan said. "Anyone who thinks 10 per cent to 15 per cent annually is possible over the next five years is dreaming. Zero per cent to 5 percent is going to be a great return."
Like we said. Just don't ask about the markets.