A small publicly traded Canadian hedge fund said yesterday that it has fallen victim to a rogue trader, forcing its managers to dissolve the fund with a $7.4-million loss to investors.
Phoenix Hedge Fund Limited Partnership alleged that a senior fixed-income trader in one of the components of the fund made unauthorized trades that violated the fund's policy of making only market-neutral investments. As a result, the fund lost about $7.4-million of its net asset value, leaving a value of $11.7-million.
This means shares in the fund are worth only about $12, well below the $16.50 the units were trading at on the Toronto Stock Exchange before trading was halted yesterday.
The partnership will be dissolved and the proceeds distributed to the shareholders "in an orderly way," the company said yesterday.
The loss will hurt a few hundred investors, said Mark Kassirer, director of Phoenix Hedge Fund Corp., although he was not able to specify the exact number of investors in the fund.
Hedge funds use sophisticated arbitrage strategies to make money while minimizing exposure to market movements. The Phoenix limited partnership was a public vehicle that invested in a number of other hedge funds, some of which Phoenix managed itself, while other components were run by other firms.
The Phoenix group, which has been managing money since 1995, runs several private funds as well, but the partnership was its only public vehicle. Mr. Kassirer and some of his partners are veterans of Burns Fry's fixed-income desk.
The problem in this case occurred in one of Phoenix's own subfunds that invested in fixed-income securities and made up about 45 per cent of the assets of the public limited partnership. Mr. Kassirer said the alleged "irregularities" were discovered early Tuesday, but it took a day to piece together the evidence. "The positions [the trader]had were supposed to be market neutral and turned out not to be," he said. Those positions were "misreported" to management, he added.
The massive decline in net asset value that came to light prompted the company to decide to liquidate the fund. Investors will likely get their money some time later this year, Mr. Kassirer said.
He said the trader who allegedly made the improper transactions has "run off somewhere" and the company has not been able to contact him. "We're not sure where he is."
Mr. Kassirer said Phoenix has called in forensic accountants to review the trading, and after that review is complete the company will decide whether to call in the RCMP's fraud division.
He said the company has no evidence that the trader was acting for his own benefit. He said it would be an "educated guess" that he was making some trades to cover up earlier losses.
"Eventually the trader wasn't able to mask what's been going on, which he had obviously been able to do for a period of time."
The trader managed to circumvent the company's risk management systems, Mr. Kassirer alleged. "He was sufficiently clever in his deceitful acts that he duped us. We end up being a victim, much like the investors are."
- Report on Business Company Snapshot is available for:
- PHOENIX HEDGE FUND LIMITED PARTNERSHIP (THE)