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Hedge fund manager Eric Sprott. (Darren Calabrese For The Globe and Mail)
Hedge fund manager Eric Sprott. (Darren Calabrese For The Globe and Mail)

Eric Sprott: Can the gold hawk find magic after the commodities crash? Add to ...

“Nobody’s going to put a penny in any exploration project right now, which obviously hurts Eric,” said Canaccord Genuity analyst Scott Chan.

Some wonder if psychology is at play. For any investor, it is hard to sell a stock at a loss. Former employees and other asset managers believe the same thing could be playing out with Mr. Sprott. He has been so public with his beliefs that abandoning them now would be all but impossible.

Then, of course, there’s Mr. Sprott’s disposition. Speaking at an event for students at Carleton University, his alma mater, in December 2011, he said: “I’m not a believer in diversification, I just do not believe in it. I never have, I never will.”

Some funds have lost so much money that the only way to earn performance fees – which are charged when returns beat certain thresholds – would be with another high-risk, high-reward bet. Yield-producing stocks such as real estate trusts are hot right now, but they aren’t going to offer the 100-per-cent returns that Mr. Chan calculates would be needed on many funds to earn such fees again.

Growing pains

Big-name asset managers are prone to certain pitfalls. As they grow, they gather assets – sometimes quickly, as in Sprott Inc.’s case – and can become unwieldy and difficult to manage.

“As firms get bigger, some of the tools that they used to become successful get taken away from them,” said Tom Bradley, the founder of Steadyhand Investment Funds, who once ran Vancouver-based money manager Phillips, Hager & North Investment Management Ltd. Sprott made its name investing in junior resource companies, but there are only so many good, small opportunities.

Sprott has also had trouble selling the stocks of smaller resources companies; it simply can’t find buyers for such large positions. Mr. Grosskopf admitted this has been a problem, but argues the worst is behind them. “A lot of those positions have fallen so much in value now … that they’re individually insignificant in the context of the fund.”

Other missteps have hurt investor confidence. Last year Sprott acquired small asset manager Flatiron Investment Management, but within six months the firm blew up and Sprott wrote off $5-million. Mr. Grosskopf did not shy away from the mistake, noting that Sprott was built with an entrepreneurial spirit, which can lead to the occasional wrong call. But he asks investors still in his funds to stick with him.

“It’s an unusually violent cyclical downturn … the worst thing you can do is react to it in a panic and sell at the wrong point,” he said.

Sprott is not the only firm suffering. AGF Management Ltd. is in pain. Even IGM Financial Inc., one of the steadiest companies in the Canadian fund management business, is experiencing net redemptions. The industry’s structure is also changing, with banks becoming fearsome competitors and exchange-traded funds swelling in popularity.

But the big question now is whether investors are willing to wait it out at Sprott. Redemptions will likely continue to be a problem this year, according to analysts, although the management team has said they believe anyone who wanted to redeem probably already has.

For Mr. Meingarten, the time to throw in the towel came in January when he pulled the last of his money. In total, he came away with a compound annual gain of about 7.5 per cent since his initial investment in 2002. But he still can’t wrap his head around how it all fell apart so fast. And he doesn’t have the luxury of staying invested while he figures it out.

“Maybe five, 10 years from now, [Eric] will be dead right. But in the meantime, I’m too close to retirement to hang in there,” he said, adding that 30-per-cent losses are just too tough to stomach at his age. “I can’t absorb that any more.”

With files from Pav Jordan.

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As Sprott’s equity funds lose money, some investors have begun pulling their cash out. That has forced the company to sell physical bullion funds to attract new clients. It has been successful in doing so – but these funds pay smaller fees than traditional mutual funds and hedge funds. (All in 2012 figures.)

$506-million

Dollar value of mutual-fund assets that Sprott lost in 2012, through redemptions and market declines. That was 20 per cent of mutual fund assets.

$307-million

Dollar value of hedge-fund assets the company lost last year, excluding offshore funds.

$1.9-billion

The amount Sprott raised by selling new bullion funds.

$5,168

The value today of a $10,000 investment made five years ago in the Sprott Canadian Equity Fund.

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