A hedge fund with a big name
Jim O'Donnell joins an old friend at Pro-Hedge Funds
Jonathan Chevreau
Financial Post
Thursday, May 22, 2003
Jim O'Donnell, the legendary Canadian mutual fund marketer, has jumped back into retail funds as advisor to Pro-Hedge Funds.
Jim O'Donnell, whose marketing savvy put Mackenzie Financial into the winner's circle in the heyday of Canada's mutual fund industry, is now in the hedge fund business.
O'Donnell is the only other shareholder in Stuart McKinnon's Pro-Hedge Funds Inc., a Mississauga firm launched this week. A predecessor firm spent a decade as investment counsellors McKinnon & Co., which used hedge funds in its mix. It became Legacy Investment Management 18 months ago.
O'Donnell has been a long-time friend, says Pro-Hedge president and CEO McKinnon, although he is not a Mackenzie alumnus.
In addition to being chairman of the advisory board, O'Donnell's investment management firm will be subadvisor on an as-yet unannounced Pro-Hedge fund. Other top subadvisors signed for that fund include Frank Mersch, former star fund manager with Altamira; and a prominent short-selling star believed to be Eric Sprott. Neither Mersch not Sprott returned calls, but McKinnon confirmed Mersch's Casurina LP will be one of five subadvisors for the fund.
O'Donnell was director of marketing at Mackenzie during the years when the fund giant sponsored such asset-grabbing innovations as racing car sponsorship. He recently completed a three-year non-compete period after the sale of his O'Donnell Funds to Bonham & Co. That fund group was later swallowed and renamed by Dynamic Mutual Funds.
After the sale, "I took a little sabbatical, travelled the world and did lot of things I wanted to do," O'Donnell said yesterday, fresh from a trip to Europe.
As O'Donnell Capital Group, he and partner Jim Goar manage a private pool for high-net-worth individuals. Goar runs the still existing O'Donnell Emerging Growth Fund, as he did before the Bonham sale.
At 66, O'Donnell recently became a grandfather and jokes he now collects $750 a month in Old Age Security. But since he is a multi-millionaire, "the government takes it all back."
He's not ready to retire and clearly enjoys the money game. "I'd like to buy or build another company."
Though dipping his toes in hedge funds, O'Donnell says he hasn't lost faith in long-only mutual funds. "They're still great. The market has gone through a difficult phase and we're not out of the woods yet. It's not a broad bear. It's more a market of stocks at this point."
He leaves shorting stocks to Goar but says "there are less opportunities to short than four years ago."
With $4-billion in assets, the hedge fund industry is only 1% as large as Canada's mutual fund industry.
However, the infant industry is garnering a far greater percentage of management talent who cut their teeth in mutual funds.
Preceding O'Donnell into hedge funds was Paul Starita, the marketing brain behind both Royal Trust Mutual Funds and later CIBC Securities Inc. Starita is a senior partner with Toronto-based iPerform, recently renamed BluMont Capital. One of the managers in BluMont's stable is Veronika Hirsch, who rose to fame in the mutual fund industry at both AGF Funds and Fidelity Investments Canada.
The first generation of hedge funds in Canada was limited to sophisticated investors with at least $150,000 to invest. Pro-Hedge and Blumont are in the vanguard of hedge funds with minimums as low as $2,500 and $5,000, respectively, plus principal guarantees, RRSP eligibility and diversified fund-of-fund structures.
Pro-Hedge's first officially announced product is Pro-Hedge Principal Protected Notes, Univest Series 1, which offers a 100% principal guarantee at maturity in 7.5 years. That's not a first: BluMont did the same with its Blumont Man IP-220 Series 2 notes (with a 10-year maturity), as does the Tricycle fund.
The first Pro-Hedge series will be capped at $200-million or July 10, whichever comes first. A second series is in development, as are two other funds.
Pro-Hedge notes are linked to the performance of Univest Ltd. fund, a multi-manager global hedge fund run by Montreal-based Norshield Asset Management. It claims a 19.5% annualized return since inception in 1991.
Investors would need $150,000 to invest directly in Univest in Ontario, unless they qualify under new accredited investor rules: $200,000 annual income or $300,000 split between a couple, or $1-million in financial assets not counting real estate.
However, investment management fees for the linked notes are higher. Pro-Hedge charges an annual fee of 1.8%, plus a 5% performance bonus. That's on top of the underlying fees for Univest of 2% a year and a 25% performance bonus. Therefore, the all-in annual fee on the linked notes is 3.8% plus a 30% performance bonus, McKinnon said.
Such fees somewhat negate the hedge fund industry's portrayal of the rival mutual fund industry as one which gets paid merely for "trying" (and lately, failing) to make money for unitholders. Mutual funds are heavily regulated, and can't use aggressive hedge fund techniques like shorting or leverage to juice returns.
Hedge fund managers make more money from performance bonuses when they generate absolute positive returns, but many do in fact lose money. Like mutual funds, they collect the basic annual fee regardless.
Hedge funds have also picked up on redemption fees, pioneered by none other than O'Donnell's former employer, Mackenzie Financial. Like BluMont, Pro-Hedge investors can cash out monthly, with the deferred sales charge (DSC) set at 6% in the first year, falling by 1% a year thereafter.
Hedge versus mutual funds? Same game and increasingly the same gang.
jchevreau@nationalpost.com
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