Hedge fund know-how best left to the pros

When it comes to the complex world of hedge funds, leave the homework and due diligence to the professionals.

"The retail investor does not really have the know-how," said Claude Porret, a member of the hedge fund ventures management committee of RMF Investment Management. The Swiss alternative investment firm manages about $18.4-billion (U.S.).

"It's like if I go to the doctor. How can I really know if the doctor is good or not? Do I have the means to do due diligence?" Ms. Porret said yesterday following a Toronto presentation to the Alternative Investment Management Association.

The leave it-to-the-professionals advice follows two hedge fund scandals in Canada that have left small retail investors in the lurch. In February, Toronto's Portus Alternative Asset Management Inc. was forced to shutter its operations and halt redemptions amid several investigations, including a criminal probe.

Then in May, Norshield Financial Group of Montreal suspended redemptions and was later put into receivership by the Ontario Securities Commission.

Ms. Porret's "quick and dirty" checklist for retail investors emphasizes the team behind the product. The accounting firm, the independent administrators and the law firm supporting the fund should be well-regarded professionals, she said.

She added that for peace of mind, she invests in higher-fee hedge fund of funds. "I prefer to pay . . . whatever they charge you and not have my money blow up in smoke," she said.

Ms. Porret's team has invested a pool of about $500-million with start-up hedge fund managers around the globe. RMF's due diligence process before investing seed capital with a new manager is intense. Managers are hired by referral and private investigators do deep research. From beginning to end, it takes an average of six months for a $20-million to $40-million investment to proceed, she said.

"We are looking for the entrepreneur. We are looking for the manager who wants his name on the door," Ms. Porret told the audience of fund managers and distributors.

And despite a rigorous screening system, RMF's track record is not perfect. Four of 18 start-up hedge fund investments were ended early in their mandate as a result of mediocre returns and in one case, a manager wanted a career change.

Marret Asset Management Inc. was under intense scrutiny for about four months last year when the Toronto investment firm successfully won distribution support from J.P. Morgan Chase & Co. Support from the New York financial giant has helped Marret court business internationally, he said.

"I think the FBI was definitely involved," Laurence Cashin, Marret vice-president, told the audience, joking that the New York financial giant reviewed Marret president Barry Allan's kindergarten transcripts.

Marret manages about $1.1-billion (Canadian) in assets, including about $250-million in hedge funds that specialize in capital structure arbitrage on Canadian high-yield issuers.