After years of feeding and caring for arbitrage funds, Ron Mayers has decided to run one himself.
In a venture that speaks to the growing depth of the domestic capital market, the former head of National Bank Financial's arbitrage team has launched a $100-million-plus hedge fund called Genoa Capital.
The premise for this venture is that, in a world filled with mutual funds that face holding stocks in a declining market, Mr. Mayers can provide another path. He's part of an emerging fraternity of fund managers who preach absolute returns, trying to post decent performance no matter what happens to benchmark indexs.
In simple terms, Mr. Mayers and peers at the dealers do instant number crunching on major mergers and acquisitions, then use this research to help arb funds figure out what stocks to buy, and what to short, in order to lock in profits.
For example, if the terms of yesterday's Alliance Forest Products takeover by Bowater implied a $2 gap between where the stocks were trading and where they will be when the deal is expected to close in a few months time, the risk arbitrage community will pile in. They would buy Alliance and short-sell Bowater and cross their fingers in hopes that the transaction actually happens.
This is territory that Mr. Mayers learned while he was still taking mother's milk. His father spent a career on the arbitrage desk at Goldman Sachs in New York, the spawning ground for a striking number of top hedge fund managers.
After earning a law degree in the United States, Mr. Mayers moved to Canada in 1987, weeks before the market crashed. He decided to follow in his father's footsteps, learning the local market at Lévesque Beaubien Geoffrion, then working briefly with two other dealers before returning to the fold to spend the past six years heading up the Montreal-based risk arbitrager sales effort at National Bank Financial and its predecessor, Lévesque.
On Mr. Mayers' watch, this has been one of the Street's three or four strongest desks in the sector. It has also been a profit centre, using the house's money to earn 20-per-cent-plus returns with far less volatility than what investors experienced holding the broad TSE 300 range of stocks.
Now, Mr. Mayers and two colleagues -- Navaid Qureshi from Scotia Capital and Frederic Boucher from Goldman Sachs -- are striking out on their own with Genoa. Well, they opened the doors yesterday and got the phones hooked up.
Genoa has attracted more than $100-million from foreign investors, and probably already qualifies as the largest hedge fund in Quebec. However, it is still in the process of registering with provincial regulators, and likely won't turn its first trade until May.
Given the regulatory limbo, Mr. Mayers couldn't say much about his plans. But within the close-knit Canadian equity arbitrage community, it's known that Genoa plans to establish a limited partnership and start marketing in May and June to institutions and wealthy individuals.
As a general rule, playing Canadian takeovers has been a good business for those with steely nerves, and the fundamentals look good. Risk-averse players, such as pension funds, tend to sell stocks quickly once takeover battles begin, leaving risk arb funds free to fight over the last dollar or two of share price appreciation. The rules in this market are clear and well understood, and those who specialize in the field say record volumes of cross-border merger and acquisition traffic are expected to continue.
The Genoa fund is expected to invest in takeover plays and opportunities born of restructuring: Canadian Pacific's split into five separate units or the spinoff of Nortel Networks from BCE would have caught Mr. Mayers' attention. While there will be a cross-border focus here, it's assumed that Genoa's principals will put up to 60 per cent of their capital to work on U.S. arbitrage plays as there are just more opportunities in the big market to our south. National Bank reloads From National Bank Financial's point of view, Ron Mayers' departure created a new client in Montreal and minimal disruption internally.
The dealer worked with its head of risk arbitrage for over a year to make sure succession was in place on the desk. On the sales side, Eric Bouchard has been taking care of clients for a number of months after being hired a year ago. And when it comes to the house's money, responsibility was handed over to Patrick McDonough. The dealer is in the process of bringing a third, more junior member on to the team. Takeovers are flying If you're into risk arbitrage, yesterday was a lousy day to be out of the market taking care of administrative paperwork.
There were a pair of substantial deals announced, each of which created trading opportunities. The most significant saw Bowater purchase Alliance Forest Products for $500-million (U.S.). On the advisory front, BMO Nesbitt Burns and Merrill Lynch worked with Alliance, while Goldman Sachs aided Bowater.
And in the deal rooted in Dia Met Minerals founder Chuck Fipke's divorce, BHP bought the diamond miner yesterday for $687-million (Canadian). Here, Credit Suisse First Boston worked with Dia Met, while BHP used RBC Dominion Securities, which has built a substantial operation in BHP's Australian homeland in recent years.
For Nesbitt, the Alliance assignment caps a hat trick in the sector over the past week.
The dealers advised the board of Pacifica Papers in its sale to Norske Skog Canada -- Merrill Lynch advised the buyer, while CIBC World Markets worked with Pacifica.
And last week, Nesbitt also helped Norske sell a pulp mill to Pope & Talbot, an Oregon-based company that used investment house Raymond James on its side of the $104-million (U.S.) transaction.
Andrew Willis