Quebec's Absolute Return Flop?

Woke up at 5:30 this morning and headed to the gym. My new routine now is get up early and head for a hard workout first thing in the morning, but when I got there, the gym was closed because it's St-Jean Baptiste Day, a national holiday in Quebec.

I'm pissed, it's raining, haven't been to the gym in a couple of days, and really needed my workout. Why am I sharing this? Because as you'll read below, I'm in a cranky and foul mood. I've had it with "Quebec's financial elite" and all the hot air they're blowing in the media. I'm going to expose what is really going on with the new venture to promote Quebec's absolute return funds, and I couldn't care less about who I piss off. As we say here in Quebec, je m'en criss!!!

First, let's back up and look at the press release covering the launch of a Quebec absolute return fund:

HR Strategies, a Québec investment management company, announces the establishment of the Fonds Stratégique à Rendements Absolu HRS (SARA Fund), which will invest its assets with Québec absolute return managers. The Fund will be available to Québec and Canadian investors.

HR Strategies will act as General Partner of the SARA Fund, which benefits from an initial investment of $175 million. The main investors are the Caisse de dépôt et placement du Québec ($60 million), Fondaction CSN ($55 million), Fonds de solidarité FTQ ($50 million) and the Régime de retraite de la CSN ($10 million). More investors may be added in the coming months.

This new fund will rely on fundamental analysis to select managers, based on their expertise, reputation and rigour. The Fund principal objective is to deliver steady, healthy returns to its investors — aiming for an average annual return of 5% above the Treasury Bill rate of return.

"In Québec, we have managers who are just as qualified as those of other major financial centres. The SARA Fund will not only enable companies and managers to develop, but will also allow investors to reduce their portfolio risk and obtain attractive and stable returns," said René Perreault, President of HR Strategies.

"We favour managers who are known for their qualitative strategies and have proven fund management track records," said Mr. Perreault. "The portfolios will be completely transparent. We will invest in highly liquid strategies, with managers who will trade primarily stocks, bonds and liquid futures contracts."

"The Caisse's participation in the SARA Fund will both provide the institution with attractive returns relative to the level of risk and boost the development of Québec's financial expertise. HR Strategies, a partner the Caisse knows well, has an interesting road map and is renowned for managing absolute return funds of funds — in addition to offering very reasonable management fees," said Mario Therrien, Senior Vice-President of Hedge Funds at the Caisse de dépôt et placement du Québec.

"This fund will have a developmental effect on Québec's financial industry. It will stimulate activity in the sector. Many features, including its transparency and manager compensation structure, are based on the best practices of socially responsible finance, helping position Montréal, Québec's largest city, on this forward-thinking idea," said Geneviève Morin, Chief Financial and Corporate Development Office at Fondaction CSN.

"In addition to relying on the talent we have in Québec's financial sector, the SARA Fund promotes the emergence of new portfolio managers and, at the same time, supports Québec entrepreneurship in this promising sector. In line with our mission, this initiative also meets the objectives of the major Montréal Finance project," said Gaétan Morin, Executive Vice-President of Investments at the Fonds de solidarité FTQ.

HR Strategies is a member of the Hedge Fund Standards Board (HFSB), an international, London-based organization that aims to implement the industry's best practices and standards, particularly about governance, transparency and manager/investor alignment of interest.. The Caisse de dépôt et placement du Québec is also a member of the Board's Investor Chapter, which includes 30 institutional investors from Europe, Asia and North America. Mr. Therrien of the Caisse also serves on the HFSB Board of Trustees.

About HR Strategies
HR Strategies Inc. (HRS) is an independent investment firm formed in 1993 and based in Montreal, Canada. HRS manages portfolios of hedge funds and other alternative investment strategies for institutional and high net worth investors. HRS is regulated by the Autorité des marchés financiers (AMF).

About the Caisse de dépôt et placement du Québec
The Caisse de dépôt et placement du Québec is a financial institution that manages funds primarily for public and private pension and insurance plans. At December 31, 2010, it held $151.7 billion in net assets. As one of Canada's leading institutional fund managers, the Caisse invests in major financial markets, private equity and real estate. For more information: www.lacaisse.com.

About the Fonds de solidarité FTQ
The Fonds de solidarité FTQ helps drive our economy. With net assets of $7.7 billion, as at November 30, 2010, the Fund is a development capital investment fund that channels the savings of Quebecers into investments in all sectors of the economy to help further Québec's economic growth. The Fund is a partner, either directly or through its network members, in 2,052 companies. With its 577,511 owner-shareholders, it has helped, on its own or with other financial partners, to create, maintain and protect 150,133 jobs. For more information, visit www.fondsftq.com.

About Fondaction CSN
Fondaction CSN invests in Québec SMBs to contribute to the maintenance and creation of jobs in Québec from a sustainable development perspective. It manages $800 million in assets, representing retirement savings from more than 100,000 shareholders. It is the financial partner of about 100 companies and partner and specialized funds in every industry and the social economy. www.fondaction.com.

When I wrote my comment in early May, I was happy to see some initiative to promote Quebec's alpha funds, but I was worried that like so many other initiatives in Quebec, it was going to be nothing but a bunch of hot air and only a few elite would profit.

Turns out I was right. My sources tell me the bulk of the $175 million has been given to established funds like Jean-Guy Desjardins' Fiera Sceptre (over $40 million in 2 funds), Vital Proulx's Hexavest, Alain Boileau's AFC Capital, André Marsan's Sigma Alpha Capital and John Dobson's Formula Growth. And when I write bulk, I mean over $120 million! I got nothing against Mr. Desjardins, a titan in Quebec's financial community. I find it rude that he ignores my requests to meet, but couldn't care less. I certainly do not have anything against Vital Proulx over at Hexavest or Alain Boileau at AFC Capital (haven't met the rest). They're running great shops and are standup characters.

What pisses me off, however, is that this is public money and the objective of this Quebec absolute return fund was to seed Quebec's emerging hedge fund managers. Where is the transparency? Why isn't the investment management agreement (IMA) governing this SARA Fund public? How much money has been doled out already and to whom? What are the criteria for selecting managers and strategies? Is the due diligence questionnaire public? What are the terms of the deal for established and emerging managers?

More importantly, who is responsible at these pension funds for awarding the mandate to HR Strategies and not another Quebec fund of funds like Innocap which offers full transparency on their managed account platform? I want to know and Quebec's public deserves to know! No more bullshit, just give us the information by making it publicly available.

Unfortunately, I already know about who's really benefiting from this bogus SARA Fund: René Perreault and his boys over at HR Strategies. By investing in established managers, they're setting themselves up pretty to market this fund to other institutional investors and profit by charging an extra layer of fees on this fund of funds. They basically got a blank cheque to do whatever they want with this SARA Fund.

What's the problem? The problem is that this is public money and there is no accountability whatsoever. The Caisse, FTQ, and Fondaction CSN fell asleep at the wheel and they bungled this up huge. And I'm exposing it for what it is, a total farce! We're never going to promote Quebec's financial talent by giving money to established managers. They don't need the money and they're not going to create the new jobs we desperately need here in Quebec.

I've spent a good part of the last month meeting many managers, established and emerging. Even established managers aren't happy with what is going on with this SARA Fund. Last I heard, one of the best hedge funds in Quebec hasn't received any allocation from HR Strategies. And don't get me started on the talented emerging fund managers who haven't received a penny from HR Strategies. They're angry and disenchanted, and rightfully so.

I had lunch with two emerging fund managers a couple of weeks ago. One of them is the commodities relative value manager I've already written about and actively helping to seed his fund. The other is a lady who knows derivatives inside out and has extensive experience trading. Both of them are exceptionally bright, experienced, hungry, have the entrepreneurial mindset and the guts to go out there, put it all on the line and succeed beyond their wildest imagination. These managers shouldn't work for Jean-Guy Desjardins. In my opinion, they both have the potential to be much bigger than Jean-Guy Desjardins.

Unfortunately, Quebec's "venerable" financial institutions aren't promoting our emerging alpha managers. They're just blowing a lot of hot air. I'm not overly concerned, however, because in 2011, the world is a small place, and if Quebec's financial behemoths aren't going to recognize and seed their own talented alpha managers, someone else will. Won't that be a slap in Quebec's face?

Note: Investors looking for more information on Quebec's hedge funds should contact me at LKolivakis@gmail.com. Watch the video below (in French) to see where my next Quebec vote is going.