For more than two years now, Natasha Sharpe has been quietly generating returns of 7 per cent to 9 per cent a year for her well-heeled clients – with little regard for the ups and downs of financial markets.
Stock markets may soar and dip, but she's impervious. So, too, with bond and money markets. Her investments lie squarely on the fixed-income side of investors' portfolios, but they are not hostage to rising interest rates.
Dr. Sharpe is chief executive officer and chief investment officer of Bridging Finance Inc. of Toronto, a firm that provides financing to small and medium-sized companies in need of short-term capital but that may not meet bank lending requirements.
Bridging Finance specializes in factoring – buying accounts receivable at a discount from businesses in need of working capital. Last summer, it reached an agreement with Sprott Asset Management LP for Sprott to manage its fund, now the Sprott Bridging Income Fund LP. Sprott markets and distributes the fund, while Dr. Sharpe and her team, including her husband, David Sharpe, president and chief operating officer, continue as sub-advisers.
As well as her financial experience, Dr. Sharpe, who is 42, has PhDs in epidemiology and community health from the University of Toronto, and an MBA from the Rotman School of Management.
How does factoring work?
Dr. Sharpe offers the following example. A jeweller client was doing well selling jewellery to mom-and-pop retailers around the province. Then he landed a big contract with a national retail chain. Suddenly he was faced with having to finance greatly increased production, shipping and distribution costs. Even if he did manage to deliver the goods, he would have to wait 90 days for the retailer to pay him.
"He had a real working capital requirement," Dr. Sharpe said in an interview. "His growth was outstripping his ability to fund it." By selling his accounts receivable at a discount to Bridging Finance, the jeweller was able to take on the increased business.
"As a factoring company, it's great for us," Dr. Sharpe said. While the jeweller was Bridging Finance's customer, the receivables – the debts – were obligations of the major retailer, so the risk of default was low.
The Sprott Bridging Income Fund is designed as an alternative to bonds and mortgage funds, which will face headwinds when interest rates rise, she said. It is also an attractive alternative to real estate investment trusts, where returns have been falling recently.
For investors, the fund is a low-risk opportunity to spice up their portfolios at a time of historically low yields, says Craig Machel, a vice-president and portfolio manager at Richardson GMP in Toronto.
While the Bridging Income fund may suit income investors, growth investors can find some tantalizing returns on the stock side of the alt investing universe, although the risks are typically greater.
Mr. Machel likes the HGC Arbitrage Fund LP, which has returned a whopping 38.4 per cent net of fees since its inception in June of 2013. That compares with 28.2 per cent for the S&P/TSX total return index.
Although September returns have not been finalized, the gap has widened in favour of HGC, a spokesman for the firm said, especially after the recent stock market carnage. HGC Investment Management Inc. of Toronto is the fund's manager.
"The reason why we like this fund is because we are interested in making money that is predictable and independent of market direction," Mr. Machel said in an interview. "It's a proven, repeatable process through all market conditions."
The arbitrage fund is not as risky as it might sound, he maintains.
How does it work? In a nutshell, the fund managers invest in "definitive deals" – mergers and acquisitions that have been publicly announced and have a firm closing date and price. "They are not speculating whether a deal will get done," Mr. Machel said.
Arbitrage is defined as the simultaneous purchase and sale of a stock in order to profit from fluctuations in the price. HGC describes itself as a merger arbitrage fund that targets more than 70 per cent exposure to definitive deals. The fund specializes in the North American small- and mid-cap market, and seeks to build returns through actively trading deal spreads both long (buying) and short (selling).
Rather than just jumping on any deal that comes along, the fund managers carefully evaluate the situation to determine where the opportunities might be, he said. To further reduce risk, they keep the duration short, Mr. Machel says. Average time to closing can be 30 days or less.
"They're small and agile and don't play in huge deals the way many merger and arbitrage guys do, so they can trade right up to the closing date," he said. "That adds extra profits."
Circumstances that would crimp the fund's returns include a drying up of mergers and acquisitions, he adds.
Both the Bridging Income fund and the HGC Arbitrage fund are designed for accredited investors – so-called sophisticated investors with high income or substantial portfolios who thus have a greater capacity to absorb financial losses. Rules for accredited investors vary from province to province.
A reminder: Potential investors in alternative strategies should bear in mind the important caveat that past performance is not indicative of future results.
As with any investment, alternative strategies vary enormously in risk and quality. Here are some things investors should consider before plunking down their money, starting with the "three P's – people, process and performance," says Craig Machel, a vice-president and portfolio manager at Richardson GMP in Toronto.
People: "Who drives the returns and are those people still there?" Mr. Machel says.
Process: "Are those returns repeatable?" That's not to say there won't be ups and downs, he cautions.
Performance: What is the range of expected returns? Stock markets can rise or fall 35 per cent or more in a year, whereas a well executed hedging strategy should offer attractive returns in a much narrower band.
Scalability and capacity: At what point does the fund become so big it starts to lose value? The desire to stay small and nimble is why successful managers cap their funds when they reach a certain size, he says.
Manager commitment: Ideally, a fund should be owner-operated with managers and key employees investing their own money.