Barely a month before equity markets nosedived in September, 2008, Kevin O'Leary took to television to promote his brand new baby: O'Leary Funds.
From the studio of his business news show Squeezeplay, the entrepreneur and TV personality trumpeted his new firm as a safe haven for investors who wanted to earn income while protecting their capital. And once global markets calmed, the money came pouring in. In 2009 and 2010, the firm raised more than $1-billion by selling new closed-end funds to retail investors – prompting Mr. O'Leary to boast that he expected the firm to reach $5-billion in assets under management within three years, and to predict he could even take it public.
Two years later, the view is very different. Earlier this year, documents filed by the firm revealed that investors had redeemed $253-million from the funds in 2011, about 21 per cent of total assets under management. Sales of the firm's closed-end funds have also ground to a virtual halt.
In part, this is a symptom of the fund industry's systemic problems. With global markets back on the rocks, clients are pulling their money at many different firms, including AGF Management Ltd., which said Wednesday that assets under management dropped 15 per cent in one year.
But the problems at O'Leary Funds run much deeper. The Globe and Mail has conducted a thorough review over the past few months, speaking to a dozen well-placed industry sources, from big name financial advisers who collectively manage billions of dollars, to former employees of the firm. The full story appears Friday in Report on Business magazine.
The narrative has a few dominant themes. Prominent investor advisers, some of whom were early investors in the funds, are growing frustrated. Early performance was solid, but some of O'Leary's recent funds, many of which are marketed as safe, stable investments, lost money almost immediately. The Yield Advantaged Convertible Debentures Fund, for instance, is down 27 per cent, before distributions, since going public in April, 2011.
When marketing the funds, Mr. O'Leary also promises capital preservation, and vows to invest in yield-paying, defensive plays. By digging through the fund's documents and speaking to investor advisers and former employees, it became clear both promises have been broken multiple times over the course of the past four years.
The Globe and Mail also uncovered some history on the man who manages the funds for Mr. O'Leary. Behind the scenes, Connor O'Brien runs the money, and in marketing documents and prospectuses, his Wall Street pedigree with Merrill Lynch and Lehman Brothers is touted. But prospective clients rarely hear anything about the problems at hedge funds he ran just before he took the reins at O'Leary.