Canadian Hedge Funds Outperform: AIMA Canada Winner

AIMA Canada-Hillsdale Research Award recipients

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The untapped riches of the Great White North have been luring adventurers for centuries. The first Europeans came to the land we now call Canada for fish,fur and spars for the Royal Navy. As the forests were cleared, treasures from underground started to beckon. Precious metals and then potash, oil and gas became the economic backbone of this country and represent a major part of its capital markets today. Investors are attracted by the healthy returns and diversification benefits our resource-based markets can provide.

Hedge fund managers have also started to take note. Although the growth of our hedge fund sector has lagged other developed countries, a sizable industry now exists in Canada. Our established system of securities regulation, stable banking industry and our strong economy provide a fertile environment for hedge fund trading strategies, particularly since our capital markets are relatively un-crowded.

Many articles have been written on the global hedge fund industry as a reasonable time series of performance data has started to become available. In contrast, very little has yet been done on the Canadian industry. This is because it did not develop until very recently and there has been no reliable source of data. Domestic as well as international investors would greatly benefit from an analysis of the risk and return characteristics of the Canadian hedge fund industry but there have as yet been no comprehensive studies.

In a recent working paper2 we provide such an analysis based on a database we compiled of approximately 200 Canadian hedge funds. Using data from 2005, we compare and contrast the risk and return of the Canadian hedge fund sector with the global hedge fund industry. We also compare these characteristics to commonly-used traditional investment benchmarks to put the true risk of Canadian hedge funds into perspective. We find that Canada’s hedge funds have provided attractive returns as well as diversification opportunities for Canadian and foreign investors. Read the full paper here.

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