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Ari Shiff manages the Inflection Strategic Opportunities Fund, a carefully curated cocktail of global market plays. (Rafal Gerszak For The Globe and Mail)
Ari Shiff manages the Inflection Strategic Opportunities Fund, a carefully curated cocktail of global market plays. (Rafal Gerszak For The Globe and Mail)

STRATEGY

A kinder, gentler way to buy into hedge funds Add to ...

Getting hit by a truck might have been the best thing to ever happen to Ari Shiff.

“I couldn’t trade,” he says. It was the 1990s, and he’d just moved to Vancouver, already several time zones behind most major stock exchanges. He thought he hated risk before the accident, but once he couldn’t nimbly react to the market, “it stopped me cold in my tracks.”

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So he called investors he knew and picked their brains. One idea stuck out – hedge funds. Mr. Shiff at first worried he didn’t have enough money to invest in this risk-hedging, alternative asset class, but he discovered the market was shifting to make them more accessible. Funds with combined long-short strategies appealed to him, so he bought a couple.

Soon, that wasn’t enough. He wondered what other risks he could cut out of his portfolio.

He became hooked on hedge funds. Two decades later, Mr. Shiff manages the Inflection Strategic Opportunities Fund, a curated cocktail of global market plays through a variety of hedge funds.

Like hedge funds themselves, investors usually need to be accredited to buy into funds of hedge funds, meaning they can be an expensive, complex and sometimes risky plays. But they can help shield a portfolio from market shakeups for higher-net-worth investors.

Investors typically need to pony up at least $1-million or more to buy into a single hedge fund, depending on its quality. Funds of hedge funds can have a lower barrier to entry; the Inflection fund, for instance, requires a minimum of $100,000, compared with $150,000 to buy into a hedge fund in Ontario. Still, because usually only accredited investors can buy FOHFs, they usually need to have at least $1-million in assets.

Hedging against risk sounds appealing, but hedge funds come with their own risks, since they employ aggressive, complex strategies to get the job done. They’re also not very liquid, often allowing investors to cash out only at certain times of year. And the fees can be high, with managers often taking both a base fee and a sizable bite out of whatever profit they generate.

FOHFs add a further layer of complexity to fee structures, since they require their own management on top of those of the individual funds.

According the Chicago firm Hedge Fund Research Inc., while investors put $26.3-billion (U.S.) of new capital into hedge funds in the first quarter of 2014, funds of hedge funds saw a “modest” capital outflow of $375-million – signalling they might not be an asset class for everyone. By pooling the assets of many investors, though, FOHFs can deploy money into numerous hedge funds, skirting around the risk of a single one. And that certainly appeals to some investors.

In fact, that’s where Mr. Shiff gets part of his sales pitch: “You’re talking about putting up a lot of money to buy a single hedge fund,” he says. “And you wouldn’t buy just a single hedge fund, because that would be like saying ‘I’m becoming a stock market investor and buying Apple, and that’s it.’”

Mr. Shiff has an eye for current themes with the Inflection fund. When the fund first launched after the global financial crisis, it focused on gaining from the crisis, such as through distressed debt. Within a few years, it shifted to sovereign debt crises, including those in Greece and Cyprus. Today, Mr. Shiff is looking toward mergers and acquisitions, as strong companies scoop up weak global counterparts.

“We’re very agnostic about stocks, even industries, but we like processes,” Mr. Shiff says. “You can define a repeatable cycle and figure out how to play that cycle.”

His Inflection fund was named the top performing U.S.-dollar FOHF in its class in 2012 by hedge fund database HedgeFund Intelligence, with a net return of 18.42 per cent. Investors who bought the fund in October of 2010 have seen gains of more than 30 per cent to date.

Hanif Mamdani, head of alternative investments with Royal Bank of Canada Global Asset Management, says that until recently he would have been reluctant to recommend hedge funds. After all, he has calculated that over the past 25 years, a portfolio with a simple 60/40 split of stocks and bonds would have delivered a tidy 8.6-per-cent annual return with a standard deviation of 9.2 per cent.

“It was the golden era for the vanilla stock-bond portfolio,” he says.

But today, with bond yields uncomfortably low and stocks valued either fairly or too high, alternative investments are a welcome portfolio addition, he says. And for investors with enough net worth, he says, there’s a “valid logical argument” to look at hedge fund products.

RBC Global Asset Management offers a variety of hedge funds, he says, but for more conservative investors who want good diversification, the bank offers two FOHFs: an “open architecture” portfolio of 20 global, independent hedge funds, and one that combines seven RBC hedge funds.

While RBC’s in-house fund-of-funds product doesn’t have the same global exposure as its open-architecture one, the bank eliminates the second layer of fees, which has its own appeal.

“That’s where you can get in trouble with hedge funds – layering fees on top of fees,” Mr. Mamdani says.

Mr. Shiff likens the cost to buying insurance – it can be annoying, but it reduces risk from the markets. “Every investor should tattoo their portfolio from 2008 on their arm,” he says, “so that they never forget what they went through, and the anxiety they felt.”

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