Canadian hedge funds outperformed benchmarks last year on a broad basis, and a few hot managers in hot sectors managed to post eye-popping returns.
The Scotia Capital Canadian Hedge Fund Performance Index finished the year up 20.2 per cent on an asset weighted basis, easily beating benchmarks such as the S&P/TSX Composite, which was up 14.5 per cent, and the DEX Universe Bond Index, which returned 6.74 per cent.
Canadian funds also outperformed those in the U.S. There, the Hedge Fund Research Inc. Fund Weighted Composite Index posted a gain of 10.5 percent, according to figures released Wednesday.
Some of the big performances that boosted the index included Vision Opportunity Fund's 47.4 per cent net return, Salida Multi Strategy's 44.9 per cent gain, Sprott Hedge Fund's 41.2 per cent advance and Rosseau LP's 40.8 per cent return.
For many managers, a big second half made the year, as it did for many investors in markets at large.
The large return numbers in 2010 came from all sorts of strategies, though funds with an equity component in many cases outperformed those that were more focused on fixed income.
Vision Opportunity Fund Limited Partnership, for example, is a real estate focused fund run by sector specialists Jeffrey Olin and Frank Mayer. It's notable for eschewing leverage.
Rosseau LP, a special situations run by Warren Irwin at Toronto's Rosseau Asset Management, looks at all sorts of investments including mining and energy.
And Salida's multi-strategy fund, since renamed Salida Strategic Growth, employs strategies such as event driven investing, a long-short portfolio of stocks, merger arbitrage, and fixed income.
While a few hedge fund managers embrace a shoot-for-the-biggest-number-possible philosophy, many hedge funds generally don't try to shoot for big returns. Instead, they aim for more steady gains while minimizing risk. In fact, big returns are viewed by some investors as a warning sign of too much volatility.
The Vision fund targets 15 per cent to 20 per cent annual returns. So how did it end up on top of the list of funds in the Scotia index for 2010, with a return pushing 50 per cent?
The fund has been successful in taking advantage of pricing distortions in real estate securities, some of which Mr. Olin chalks up to investors chasing yield instead of focusing on total return.
"There's a distortion towards yield -- yield sells," said Mr. Olin in an interview. "We look at yield, for sure, where it's relevant, but we look at total return."
One of the big winners last year for Vision was Parkbridge Lifestyle Communities, which was taken over by a pension fund for a big premium.
For 2011, even though real estate has had a significant rebound, Mr. Olin foresees more opportunities. One of his big holdings is Edleun Group Inc. , a consolidator in the Canadian child care sector.
Mr. Olin says that sector has been consolidated by huge institutional buyers at attractive prices in other countries, but Canada is a laggard.
Another favourite is Morguard Corp. , which he estimates is trading well short of net asset value, perhaps because it is illiquid and doesn't pay a big dividend.
The bet is still on gold and an inflationary environment for Mr. Irwin at Rosseau, who is coming off two hot years, including an almost 100 per cent return in 2009. He warns investors that bonds are in trouble, and bullion is a better play.
"If you own any bonds with maturities over five years, take a serious look at your exposure because you are at risk of a thorough thumping," he wrote in his recent 2010 review letter to investors. "As the U.S. government continues to print money, the outlook for gold remains strong and the peak may be years away."
Here are returns from other Canadian hedge funds in 2010. The numbers are taken from firm web sites.
-- Blair Franklin Global Credit, 10.7 per cent.
-- Waratah Performance, 22.5 per cent (since an inception date of July 1). The target return is 15 per cent.
--Waratah Income, 6.4 per cent (since July 1). Target return 10 per cent.
--Waratah One, 7.9 per cent (since July 1). Target return 10 per cent.
--Marret High Yield Hedge, 14.3 per cent
-- Marret Investment Grade Hedge, 15.8 per cent
-- Arrow Marret Resource Yield Hedge, 21.4 per cent.
-- Front Street Canadian Hedge, 25.2 per cent
--Front Street Canadian Energy Resource, 48.1 per cent
--Blumont Core Hedge, 0.15 per cent
--Blumont Hirsch Performance, 20.1 per cent
--BT Global Growth, 26.2 per cent
--Di Tomasso Equilibrium, 13 per cent
--Dynamic Power Hedge, 36.2 per cent
--Fiera Global Macro, 0.5 per cent
--Fiera Market Neutral, 5.3 per cent
--JCClark Focused Opportunities, 3.4 per cent
--JCClark Preservation Trust, -7.3 per cent
--Landry Morin Long/Short Momentum, 5.4 per cent
--Palos Income, 21.8 per cent
--Picton Mahoney Long/Short, 16 per cent
--Picton Mahoney Market Neutral, 6.8 per cent
--Primevestfund, 32.5 per cent
--Rival North American Growth, 26.5 per cent
--Sentry Market Neutral, 10 per cent
--Spartan Multi Strategy, 11 per cent