The Canadian hedge fund industry got a vote of confidence Monday, with analysts pointing out that the plumbing problems of U.S. prime brokers are unlikely to clog domestic markets.
A number of hedge funds, including Salida Capital, ran into trouble when some or all of their holdings were frozen at U.S. prime brokerages such as Lehman Brothers. Prime brokers provide trading and financing services to hedge funds.
The failure of Lehman, a major player in this space, has tied up the assets of scores of funds. The ongoing credit crunch has revealed previously unanticipated, or under-covered, systemic risks. A year ago, no one spent much time fretting over the durability of Lehman's prime brokerage desk.
After reviewing back-office arrangements at domestic publicly-traded money managers with hedge fund operations, Scotia Capital pointed out that the Canadian prime brokerage community, dominated by deep-pocketed bank-owned firms, is better equipped to handle volatile markets.
“In our view, the fallout from the collapse of Lehman Brothers, which left a number of hedge funds unable to access a portion of their assets, highlights the settlement risk associated with independent brokers that lack access to the relatively more stable financing enjoyed by those owned by banks,” said the Scotia Capital report.
“Dynamic [an arm of DundeeWealth], Sprott, and Gluskin Sheff are among Canada's largest single-manager hedge fund sponsors. We see very little risk that they will find themselves in a similar position” to the funds blindsided by Lehman Brothers' failure, said Scotia Capital's Kevin Choquette and Phil Hardie, who cover the financial services sector.
