Chw Vol10 Isu7 Quarterlyweb

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Chw Vol10 Isu7 Quarterlyweb

  1. 1. Q U A R T E R LY R E V I E W O F H E D G E F U N D S & A L T E R N A T I V E I N V E S T I N G JULY 2010 VOLUME 10 ISSUE 7 FORECASTING BEYOND THE CREDIT CRISIS – REVISITED CANADIAN INCOME TAX TREATMENT OF DERIVATIVE GAINS AND LOSSES HIGHWATER DIVERSIFIED OPPORTUNITIES FUND PEOPLE ON THE MOVE OLYMPIAN L/S EQUITY FUND, L.P.
  2. 2. Performance Summary June YTD 2010 CHW HEDGE FUND INDICES (CHW-HF) % % CHW-HF Composite Index -1.12 -1.52 Tony Sanfelice, President -1.33 -1.87 CHW-HF Equity Hedged Index Canadian Hedge Watch Inc. CHW-HF Notes Index 2.92 2.02 CHW-FOHF Index -0.33 0.70Canadian Hedge Watch Introduces Scotia Capital Canadian Hedge Fund IndexNew Magazine SC CDN HF Index Asset Weighted 0.42 3.90 SC CDN HF Index Equal Weighted -0.60 1.16Canadian Hedge Watch is proud to introduce a new addition toour family of unbiased news and reporting vehicles. We welcome CSFB/Tremont Hedge IndicesCanadian ETF Watch magazine, launching soon. Along with this CSFB/Tremont Hedge Fund Index -0.84 -2.76new addition we will be incorporating the quarterly newsletteralong with the monthly issue as one comprehensive guide to Convertible Arbitrage 0.01 -2.51investing and forecasting the trends and environment surrounding Dedicated Short Bias 5.45 5.84the alternative investment space. Emerging Markets -0.03 -4.28In this month’s CHW issue we explore several key areas of the Equity Market Neutral -0.99 -3.30financial sector that are developing within the alternative space.Interviews with two of Highwater Capital Management’s key Event Driven -1.58 -3.07players; Ara Nalbandian, CFA Portfolio Manager and Matt Manara, Distressed -1.10 -2.50Regional Sales Manager, as they walk readers through an in-depthlook into Highwater’s approach to investing in their hedge fund. Event Driven Multi-Strategy -1.97 -3.53An interview with Michael J. Levas from Olympian Capital L.L.C. Risk Arbitrage 0.10 -1.52in Fort Lauderdale, Florida, gives you an account of how they 0.92 -0.79 Fixed Income Arbitragesuccessfully analyse and manage their funds while digging deepinto their investment process and their approach to risk Global Macro 0.56 -0.63management. Michael further explains his outlook on the markets Long/Short Equity -2.07 -4.13and forecasts future trends. Managed Futures 0.42 -4.03Stan Maj of Ernst & Young LLP looks at the Canadian Income TaxTreatment of Derivative Gains and Losses. Providing guidance to Multi-Strategy -0.81 -2.19tax auditors and digging deeper into the four recent interpretations GLOBAL HEDGE FUND INDICESfrom Canada Revenue Agency (CRA) will give you an insight intoCRA’s assessing practices regarding derivative financial instruments. Hennessee Hedge Fund Index -1.35 0.20 HFRI Fund Weighted Composite Index -0.86 -0.21Philip Niles from Butterfield Fulcrum forecasts beyond the creditcrisis, revisiting the four-part series from 2009 concluding that HFRI Equity Market Neutral Index -0.71 -0.69there were more difficulties yet to come in the equity markets. HFRI Fund of Funds Composite Index -0.70 -1.03He looks into the changes that have occurred since last year andfinds some new evidence suggesting that we may be moving in MARKET INDICESthe right direction. MSCI World Index (C$) -1.51 -8.53Whatever 2010 holds for the industry, fund managers will MSCI World Index (US$) -3.93 -9.55continue to demand ever-more sophisticated services andtechnology from their service providers. MSCI Emerg Markets Free Index (C$) 1.21 -4.97 Dow Jones 30 Industrial Average (US$) -3.58 -6.27 NASDAQ Composite Index (C$) -4.73 -5.99 NASDAQ Composite Index (US$) -6.55 -7.05 S&P 500 Total Return Index (C$) -3.39 -5.59 S&P 500 Total Return Index (US$) -5.24 -6.65Canadian Hedge Watch appears live on S&P/TSX Composite Index Total Return -3.98 -3.85BNN – Business News Network each month. www.canadianhedgewatch.com
  3. 3. C O N T E N T S J U L Y Q U A R T E R L Y FEATURES DATA Forecasting Beyond the 2 Hedge Fund Performance Tables Q2 18 Credit Crisis – Revisited Philip Niles, Butterfield Fulcrum Graphs and Tables Related to Asset Size 28 and Distribution of Canadian Hedge Funds Canadian Income Tax Treatment 4 Number of Hedge Funds Reporting 28 of Derivative Gains and Losses Number of Hedge Fund Managers Reporting 29 Stan Maj, Ernst & Young LLP, Toronto Hedge Funds Reporting Assets 30 Hedge Funds Assets Under Mngment. (AUM) 31 Highwater Diversified Opportunities Fund 6 Ara Nalbandian, Highwater Capital Management Hedge Fund Asset Change 32 Distribution of Canadian Hedge Funds by Asset Size 33 People on the Move 8 Reported Canadian Hedge Fund Assets by Fund Manager 34 Matt Manara, Highwater Capital Management Average Asset Size of Canadian Hedge Funds Over Time 35 Monthly Average Return (Equally Weighted) 36 Olympian L/S Equity Fund, L.P. 10 Distribution of Returns in the most recent Quarter 37 Michael J. Levas, Olympian Capital Management LLC. Distribution of Monthly Average Return 38 (Equally Weighted, since December, 1994) Around The Hedge 12 Quarterly Average Returns (Equally Weighted) 41 12-month Rolling Standard Deviation (annualized) 42 2010 Calendar of Events 52 Performance Comparison: 43 Canadian Hedge Funds vs. Major Indices Commentary 43 Comparison of Returns 44 Efficiency and Calendar Year Returns 45 Correlation Matrices 46 Canadian Hedge Funds Introduced in the Last Quarter 47 Canadian Hedge Fund Indices – June 2010 49Contact InformationCanadian Hedge Watch Inc.20 Toronto St., Suite 820, Toronto, Ontario M5C 2B8 tel: 416.848.0277 ext. 2269 toll free: 1.877.249.9249 fax: 416.848.0278Editorial, Media & Advertising: finucci@canadianhedgewatch.com Subscriptions: subscription@canadianhedgewatch.comCanadian Hedge Watch is published 11 times per year by Canadian Hedge Watch Inc. We welcome articles, suggestions and comments from ourreaders. All submissions become the property of Canadian Hedge Watch Inc., which reserves the right to exercise editorial control in accordance withits policies and educational goals.DisclaimerCanadian Hedge Watch (CHW) presents news, information and data on both Canadian and Global alternative investment activity. The information presented is not to betaken as an endorsement, investment advice or a promotion for the organizations and individuals whose material and information appears in this CHW publication or onthe Canadian Hedge Watch website.The material presented, separate from paid advertisements, is for the sole purpose of providing industry-specific information. As with all areas of financial investing, CHWrecommends strongly that readers should exercise due diligence by consulting with their investment advisor or other trusted financial professional before taking any actionbased upon the information presented within these pages. Volume 10 Issue 7 - July 2010 1
  4. 4. Forecasting Beyond theCredit Crisis – Revisited As the keen reader may recall, I did a four-part series in Canadian Hedge Watch approximately one Phil Niles year ago which sought to extrapolate beyond the then current market conditions using three key metrics: the Dow/Gold ratio, the stock market Price/Earnings ratio, and the current level of the money supply. Given that many seem to feel that we have moved beyond those gloomy days, re-examines where I thought it would be worth re-examining where we currently stand using these same three metrics. What do these three statistics now indicate, with the benefit of an additional twelve months of data and a healthy dose of further perspective? We will begin with a quick refresher of those metrics, how we currently stand they are to be used, and what they can indicate about the direction our markets are heading. Our Metrics Re-Introduced on credit crisis The Dow/Gold Ratio – defined simply as the ratio of the Dow Jones Industrial Average to the price of gold in the spot market. It has long been seen as one of the most sought after indicators pertaining to relative value in the market. As we have seen over the past year in a variety of the world’s major currencies, holdings in cash can come in and out of vogue and, by extension, the value of the currency can fluctuate as much as stock markets in general. This generally will shift the focus in and out of gold. The Price/Earnings ratio – probably the most famous financial metric, the P/E ratio is a representation of what price must be paid per dollar of earnings in the underlying investment. In this examination, we will be using the Dow Jones Industrial Average as the underlying proxy for the market as a whole. Frequently, the level of the stock market’s P/E ratio can be used as a descriptive statistic pertaining to investor confidence; in good times, investors are willing to pay more for stock market earnings based on the perception that the good times will keep on rolling. Of course, the opposite must hold true in down times and hence why the P/E ratio can act is a good proxy for market exuberance. The Money Supply – very generally, the money supply is the total amount of money held throughout an economy at a particular point in time. The basic definition involves two major components: the total currency in circulation as well as “demand deposits”, or the amount held in current accounts. In this example, we will be using M1 as the definition of the money supply, given its lengthy track Philip Niles record of calculation as well its simplicity. Butterfield Fulcrum Our Examination Reprised We begin with the Dow/Gold ratio. From the initial examination, we found that underlying secular bear markets usually ended with a Dow/Gold ratio somewhere around 5, with the very bottom in the early 1980’s being around 1. At the time of writing last year, the Dow/Gold ratio was calculated as follows: Closing level of the Dow Jones Industrial Average 9,015.10 The Price of Gold (US $/oz) $843.15 Dow/Gold Ratio 10.69 If we fast forward to the end of June 2010, we are faced with the following figures: Closing level of the Dow Jones Industrial Average 10,434.17 The Price of Gold (US $/oz) $1,239.74 Dow/Gold Ratio 8.42 2 www.canadianhedgewatch.com
  5. 5. So from the above comparison, we can see that the Dow/Gold ratio has We identified that the secular bull markets began with peaks in M1 whiledropped, and indeed it has dropped by more than two full points to rest secular bear markets began with troughs. As such, if the currentaround 8.42. Most noticeably, and not unsurprising given the weakness difficulties in the market were coming to an end, we would expect M1 toseen in the currencies of the world, the price of gold has risen be at a peak. Furthermore, we can see that the annual rate of change atdramatically. While this revised ratio would certainly lend credence to the the end of the examination period was however around 0%, but onenotion that we are nearing the bottom of a secular bear market trend, could perceive a general upward shift.history would indicate that we are still not quite through. To reach a ratio Without further ado, this author can confirm that the US Federal Reserveof 5, we would need to see the Dow Jones Industrial Average drop to reports the annual change in M1 from May 2009 to May 2010 to be 7.0%.around 6,200 (assuming gold prices hold steady) or see the price per Certainly this is an increase from what was observed last year, but it is notounce of gold rise to more than $2,000 (assuming a similar absence of necessarily at the peak one might expect. The figure of 7.0% ischange in the Dow). Even more noticeable changes would have to occur approximately what was witnessed in the early 2000’s in the effort toto get us down to the all-time low from the early 1980’s. As mentioned in counteract that economic downturn, hardly a standout peak for thethe original study, it would likely be a combination of the two that would statistic. Early in the 1980’s, at the close of the last secular bear market,bring about a lower ratio, but regardless of whether you are a stock the annual change in M1 hit double digits. Though the secular bearmarket bear or a commodity bull, history is calling for further change. market before that one featured a high single digit annual change in M1,The price/earnings ratio of the Dow Jones Industrial Average is similarly it would be reasonable to expect a figure higher than 7.0% to signal thetelling. To recap, at the time of writing the initial article, the Dow was end of the current secular bear market.sporting a P/E ratio slightly in excess of 13. As of the end of June 2010,the Dow is reflecting a P/E ratio of approximately 15.6. The potential Conclusionreasons for this increase in the P/E ratio are many: heightened consumer The four-part series from 2009 concluded that there were more difficultiesconfidence in the future of the markets, a return of capital to the markets yet to come in the equity markets, using the Dow Jones Industrial Averagefollowing the credit crisis, and a decrease in DJIA earnings are all potential as a market proxy. Using the same three metrics (the Dow/Gold ratio, thefactors. The important thing to note is that, regardless of the reasons for Price/Earnings ratio of the DJIA, and the change in the level of the moneythe change, the ratio has actually increased. From our previous supply), the revised examination performed with current data seems toexamination from 2009, we found that the bottom of the secular bear indicate that we are not out of the proverbial woods just yet. All threemarkets in recent history featured a P/E ratio on the Dow Jones Industrial ratios, when taken together, seem to be indicating a general move in theAverage that was less than 10, even as low as approximately 5. This is a right direction towards the end of the current secular bear market, howeverfar cry from where the market currently stands and, to be sure, it is striking the movement has not been especially pronounced. In fact, as mentioned,that the P/E ratio has actually increased over the last year. the P/E ratio has actually moved in the opposite direction. As a final telling statistic, reprinted below is the table from the original study outlining theThe money supply is our third metric for study in this examination and, last six secular market trends, their average returns, and their durations:perhaps, the least understood. If you recall from the study of a year ago,we do not particularly care about the absolute level of M1, but rather theyear-over-year change in the level of M1. Most will not be surprised to Table 1: Dow Performance During Secular Bull and Bear Marketslearn that the absolute level of M1 has risen dramatically over the lastyear or so. In an effort to stimulate the economy, the powers that be in the Secular Duration Average Secular Duration AverageUnited States have released a great deal of cash into the market to easy Bear (Years) Yearly Bull (Years) Yearlythe liquidity concerns that have been such a plague. But where does that Markets Return Markets Returnleave us with respect to the underlying secular market trend? Recall the 1906-1921 16 1.58% 1922-1928 7 17.20%graph from 2009: 1929-1949 21 1.69% 1950-1965 16 10.60% 1966-1982 17 1.59% 1983-1999 17 15.30%Figure 1: Change in the Level of the Money Supply (M1) 1959-2008 Source: The Author (2009) From the above table, we can see that the average duration of the last three secular bear markets has been a lengthy eighteen years. Eighteen years. Given this fact, and the previously presented statistical analyses, it would seem optimistic to expect the current trend to be already reaching its conclusion. Really, taking this average duration, we would be only just passing the half-way point of the current secular market trend. Without a doubt, there will be bull markets for equity participants to enjoy over the coming years, but the trend seems to be clear: we have got some distance to go yet. Source: The Author (2009) Volume 10 Issue 7 - July 2010 3
  6. 6. Canadian Income TaxTreatment of DerivativeGains and Losses Four recent Interpretations from the Canada Revenue Agency (the “CRA”) have provided insight into Stan Maj provides the CRA’s assessing practices regarding derivative financial instruments. These internal Interpretations were issued in March and April of 2010 by the Income Tax Rulingsinsight into the CRA’s Directorate of the CRA. They provide guidance to tax auditors on assessing practices for gains and losses arising from settlement of foreign exchange contracts used for hedging purposes. The issue considered was whether the gains and losses should be on account of income or on account of capital.assessing practices. The four Interpretations address similar fact situations, but for different taxpayers. They are noteworthy because they include a lengthy analysis and discussion of the issues. Each taxpayer had used short-term foreign exchange contracts to hedge its exposure to foreign exchange fluctuations on its net investment in foreign subsidiaries. The contracts were rolled over regularly as they matured in order to maintain the hedge. The CRA concluded that income treatment was appropriate. The guidance summarized in these Interpretations would likely be extended by the CRA to other situations where derivatives are used to hedge foreign exchange risk, such as that related to a foreign currency denominated investment portfolio held in an investment fund. Several key court decisions that have considered this issue are referred to in the Interpretations. Though different shades of interpretation are always possible, the CRA’s application of these decisions to the particular facts appears reasonable. A widely-accepted principle is that income treatment is appropriate for gains and losses on derivatives. The reason is that these financial instruments are speculative by their very nature because they produce no income, and a taxpayer can only profit by resale or settlement. At the same time, the courts have concluded that the gain or loss from a derivative instrument that is used to hedge a capital transaction should also be on capital account. The difficult issue is determining when a derivative should be treated as a hedge for these purposes. Stan Maj Partner Ernst & Young LLP, Toronto 4 www.canadianhedgewatch.com
  7. 7. In order to constitute a hedge there must be sufficient inter-connection or Tax uncertainty may be a greater problem for a fund manager than wouldintegration between the derivative instrument and the underlying be posed by either income of capital treatment. From the fund manager’stransaction. The CRA states that a requirement for capital treatment is an viewpoint it may not matter whether the derivative contracts generateactual or anticipated sale of capital assets. In other words, there must be gains or losses, or are on income or capital account, so long as they fulfilllinkage between the derivative and an underlying transaction rather than their purpose of providing a hedge against currency fluctuations. Frommere linkage to capital assets and liabilities. In ideal circumstances the the CRA’s perspective it is relatively easy to challenge the treatment takenderivative instrument would be matched perfectly to the foreign currency for a particular fund because there is no bright-line test, and theexposure both in terms of amount and timing. In the real world, however, circumstances rarely point clearly in only one direction. Of course, it cancircumstances are rarely ideal. The amount of the exposure typically be expected that any CRA challenge will be most aggressive when an assessment will yield additional tax revenue for the fisc.changes more frequently than derivative contracts can practically beadjusted. Timing of crystallization is often either uncertain, or derivative Fund managers need to be aware that this issue is gaining greater profilecontracts are not commercially available for the anticipated duration. within the Industry and with the CRA. Steps should be taken to reduceThere is no clear answer to the question, “How close is close enough?” risk and uncertainly. Offering documents and other public information should clearly state the manager’s intention when derivative instrumentsThe courts have found that the taxpayer’s intention when acquiring an asset are used as part of a hedging strategy. The manager may also want tois a relevant factor when deciding whether income or capital treatment is warn investors of the potential risk for reassessment. Finally, properappropriate. Acquiring a derivative instrument with the intention of hedging execution of a hedging strategy is critical. The manager not only has toforeign exchange exposure related to a capital asset supports capital intend to hedge but also has to execute in an inter-connected andtreatment, but intention alone is not sufficient. If it is found that the integrated manner.acquisition was speculative, or a transaction to dispose of the underlyingcapital asset is not foreseeable, income treatment may be appropriate. Stan Maj focuses on income tax matters related to the financial services sector, and leads the asset management tax practice in Canada. Stan advisesThe CRA has an administrative position that permits taxpayers entering on tax compliance issues, and tax aspects of structuring and reorganizinginto foreign currency futures contracts to elect capital treatment as a investment funds. He is experienced with innovative fund structures and“speculator” when doing so does not form part of the taxpayer’s business derivative instruments.operations. Unfortunately, the CRA has decided not to extend thisadministrative position to investment funds. Stan sits on the Taxation Working Group of the Investment Funds Institute of Canada and the Industry Regulation & Taxation Committee of the InvestmentGenerally accepted accounting principles contain rules related to hedging Counsel Association of Canada.that govern when a derivative instrument should be treated as a hedge foraccounting purposes. The CRA stated, and the courts generally agree, Stan’s previous roles include Vice President of Tax for Metropolitan Lifethat accounting treatment does not determine tax treatment. Insurance Company and Vice President of Tax for Royal Bank of Canada. He is a CA, a CPA, a lawyer and a Fellow of the Life Management Institute. Volume 10 Issue 7 - July 2010 5
  8. 8. Highwater DiversifiedOpportunities Fund CHW What inspired the launch of the Highwater Diversified Opportunities Fund in 2007? An interview with Ara Nalbandian During my time as Senior Portfolio Manager at a leading Canadian fund company, I achieved exceptional positive risk-adjusted returns for investors in the funds I managed.Ara Nalbandian, CFA, I’ve always believed a contributor to this success was my conviction to investing fully directly alongside fund investors. Aligning the interests of investors and managers is the best way for the investment management industry to evolve. Highwater Capital Management Corp. was established Portfolio Manager in 2007 and, in December of that year, the Highwater Diversified Opportunities Fund was launched. Despite the challenges all managers faced during this period it has significantly outperformed North American total return equity benchmarks by 33%. Rewarding performance is at the core of - Highwater Capital Highwater Capital Management’s philosophy; delivering investor’s superior risk-adjusted returns with a modest, highly competitive performance fee structure. Management CHW How would you describe your investment management style? AN Our management style could be described as diversified North American active value. We apply a rigorous and disciplined approach evaluating individual companies from the bottom-up on a fundamental basis. We are determined to generate consistent portfolio income through dividends, income generating option strategies (i.e. covered call option writing) and active portfolio management. We invest in a diversified portfolio of publicly listed North American securities predominantly in mid and large cap equities and to a lesser extent fixed income securities including preferred shares and convertible debentures. We maintain a concentrated portfolio of approximately 30 to 35 individual securities, however unlike conventional value investing strategies; we are active in managing each of our positions to optimize income and total risk-adjusted returns. CHW What is your process for unearthing companies/securities to include in your portfolios? How do you create value in your portfolios? AN We first start with identifying companies that exhibit superior operational metrics, management expertise and shareholder-friendly behaviour. This can be demonstrated through various factors including: a focused strategy, niche or strategic positioning, product innovations, supply chain improvements, effective cost-containment, stable and increasing dividends and cash flows, accretive acquisitions and aggressive share buy-backs. We then review a company’s fundamentals on an absolute basis and relative to its peer group. Our focus is primarily fundamental value-investing, however we do use a tactical approach to asset allocation as we consider the Ara Nalbandian CFA FCSI DMS macro-economic backdrop when taking positions in individual securities, sectors and asset classes. Portfolio Manager Once we have established our estimated intrinsic value and see potential for attractive risk adjusted Highwater Capital Management appreciation, we build out a strategy to maximize the income from that particular security. We continuously manage and adjust our positions to meet absolute return objectives. We use publicly listed options to fine tune positions, produce tax efficient portfolio cash flow and reduce portfolio volatility. Remaining disciplined in this process has contributed significantly to the Highwater Funds’ consistent outperformance of benchmarks and peers. 6 www.canadianhedgewatch.com
  9. 9. CHW Is the buy and hold strategy dead? CHW What is the most significant position you will take in a givenAN I wouldn’t go as far as saying that the buy-and-hold strategy is company or sector?dead, but it has evolved. The discipline of value investing is still relatively AN While we maintain a concentrated portfolio targeting 30-35young at just over 75 years old. Innovators like Warren Buffett inspired by companies, the fund’s exposure to any sector is generally capped atthe intellectual framework developed by Benjamin Graham in the 1930s 20-25% and individual company exposure is limited to 10% of thehelped value-investing develop and popularized the buy-and-hold portfolio. The majority of our holdings are in large cap value, dividendphilosophy. The one constant in the world is change. The investment paying equities while about 20% of the portfolio currently consists of fixedindustry is no stranger to evolution. Given the current range-bound market income securities including preferred shares and corporate bonds. Thewhere investors are hyper-sensitive to periodic updates of economic and result is a portfolio diversified by sector, asset class and various otherearnings data in the wake of the 2007-2008 recession, active managementtends to fare better relative to conventional buy-and-hold strategies. That sources of risk we monitor.said, I would not discount the importance of owning well-run businessesand purchasing them at a discount to their intrinsic value. Our approach CHW What other risks should investors consider when investing intakes value investing to the next level by actively managing positions and hedge funds?using income generating option strategies. We believe our approach is AN Investors should always look for a reputable auditor, an externalparticularly suitable for the current market environment. fund valuator and custodian as well as be cognizant of exposure to private/ illiquid securities or individual sector overconcentration. WeCHW In current market conditions with the downturn of 2008 still provide investors transparency of holdings with no private securities andfresh in investors minds, why should they consider equities and/or a diversified portfolio. We have also established industry leadinghedge funds? What have you learned from the downturn in 2008 inregards to protecting the portfolio and capital preservation? partnerships with leading Canadian firms in fund audit, valuation and custody.AN Dismissing equities and hedge funds altogether appears to bea knee-jerk reaction to the challenges investors faced in 2008. Hedge CHW Where do you see the fee structure of Hedge Funds going?funds retain some of the best and brightest asset managers our industryhas to offer and with increasing regulatory requirements the AN The typical fee structure for Hedge Funds tends to be a 2%communication level between investors and money managers has management fee and a 20% performance fee if the manager generateswitnessed remarkable improvements in recent years. We believe equities positive returns in excess of a specified hurdle rate or high water mark.are a key asset class for generating total returns and at current valuations We believe that this typical structure demonstrates the industry’sare considerably attractive relative to bonds and other securities. In the propensity for excess and, as hedge fund investors become increasinglypast 25 years, there have been only two instances when the spread of the savvy, fund managers will need to adjust their base management feeearnings yield on the S&P 500 and the 10-year U.S. treasury has been structures lower and place a greater focus on performance. The hedgegreater than the spread on long-term corporate bonds. The first time this fund industry is highly competitive, and if the goal is to make money forhappened was at the end of 2008, and the second is now. We are your investors, positive risk-adjusted excess returns should be thebecoming increasingly bullish on equities and continue to seek out primary source of reward. The fee structures for Highwater’s Funds arecompanies with strong balance sheets, recurring revenues and extremely competitive earning management fees at about half the rate ofsustainable/growing cash flows. its peers and collecting only a 15% performance fee on any positiveTo answer the second part of the question, 2008 was a challenging year excess returns above our high water mark. In addition, the F-Classfor investors and managers alike, and in many ways it was a year of version (available to fee-based investment accounts at leading Canadianedification. Money managers who deployed capital in income generating Investment Dealers) of the Highwater Diversified Opportunities Fundsecurities and prudently employed leverage tended to insulate their charges a zero base management fee, making it a unique and attractiveportfolios from the broader market downturn. What we have learned from investment.2008 is that the severity of black-swan scenarios cannot be under-estimated simply based on the low frequency of occurrence. We took the CHW Where do you see Highwater Capital Management in five years?opportunity to shield a portion of our portfolio by buying put options on AN We would like to continue doing what we do best, and that isthe S&P 500 Index during periods when the Volatility Index (VIX) was low manage assets and consistently produce outstanding risk-adjustedrelative to its historical average. While we use options on individual returns for many years to come. We believe our disciplined strategies forsecurities to enhance income, using them to short the index helps diversified income through multiple sources and our unparalleled focus onmitigate our risk in the event of a dramatic market decline. Just like buying aligning our interests with our investors will continue to produce attractiveinsurance, you don’t look forward to facing the negative outcome, but risk adjusted returns and an increasing and happy client base.you are glad that, if such an unlikely outcome occurs, you are protectedto some degree. Since the priority is to preserve capital, when the cost Ara Nalbandian, CFA FCSI DMS, is a Portfolio Manager for Highwaterof buying portfolio insurance is low, it doesn’t hurt to have an added level Capital Management. He specializes in absolute return strategies investing inof market protection. North American securities.CHW Are hedge funds synonymous with leverage and/or risk? Ara started his career at Richardson Greenshields / RBC Dominion Securities in 1996 and later joined BMO Nesbitt Burns in 1998. He was awarded theAN While investors tend to consider hedge funds as high risk, the Chartered Financial Analyst designation in 2000 and Derivatives Marketdegree of risk can vary depending on the management style, the Specialist designation in 2002. Mr. Nalbandian was most recently Seniorunderlying securities and use of leverage. Hedge funds are not Portfolio Manager at Sentry Select Capital Corporation, where he achievedsynonymous with risk. However, certain fund managers do use leverage tremendous success between 2000 and 2007. Since December 2007, he hasto add exposure in any combination of going either long or short the been the Portfolio Manager of the Highwater Diversified Opportunities Fund.market. Our use of leverage is modest and we employ it opportunisticallyto enhance our exposure to a diversified income generating portfolio ofsecurities and strategies. Volume 10 Issue 7 - July 2010 7
  10. 10. People on the Move Matt Manara was recently appointed Regional Sales Manager with Highwater Capital Management. An interview with Canadian Hedge Watch asked Mr. Manara to discuss his role and the changes taking place. Matt Manara, CHW Why did you decide to join Highwater Capital Management? Matt Manara It was an easy decision. It is an excellent opportunity to be a part of an experienced team with a solid track record of integrity and performance. It’s an exciting time to be a part of an Regional Sales innovative and growing firm that is in the process of communicating our unique value added approach to investment advisors across the country.Manager - Highwater CHW What is your first priority in the sales department? MM First priority would be to continue our sales momentum. Getting our story out to advisorsCapital Management that appreciate the value we create for their clients. I am very pleased with the tremendous positive reception we’ve had in meetings with advisors. We will continue conducting meetings and getting referrals nationwide. CHW What is your unique value proposition? MM Our value proposition is simple: proven performance, high level of transparency and attractive low-cost structure. We provide direct access to an experienced and disciplined portfolio management team. We conservatively run unconstrained concentrated portfolios that use options to generate income and reduce risk. We give clients a service experience that is second-to-none. CHW Where does Highwater Capital Management fit in the hedge fund industry? MM We believe our funds are core holdings. Our strategy is called diversified North American active value, but I tend to think of it like a long/short balanced fund. We are well diversified by asset class and sector and use sophisticated tools conservatively to enhance risk-adjusted returns. CHW Where do you see the current opportunity at Highwater Capital Management? MM The opportunity is created thanks to the current market environment. We are well positioned to take advantage of a flat market with a wide trading range. Our value-added option Matt Manara strategies that produce income and reduce risk combined with a disciplined value approach put us Regional Sales Manager in a great position to continue to generate absolute returns for our clients. Highwater Capital Management Matt Manara, is Regional Sales Manager for Highwater Capital Management. As an honours commerce degree graduate, Matt started his career in 2004 working on a senior investment team at CIBC Wood Gundy. Through positions of increasing responsibility, he was named VP of Regional Sales at Mavrix Fund Managment where he spent the last four years. Mr. Manara was an intricate part of Mavrix Fund Managements exponential growth to a peak of $860 million. Matt has a wealth of knowledge and experience in building and fostering new and existing relationships. 8 www.canadianhedgewatch.com
  11. 11. © 2010 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent memberfirms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG. In step with market needs. At KPMG, we understand We provide leading that the Investment professional services Management industry has within the domestic and undergone sizeable offshore alternative growth and change in the investments space, past few years. The recent including: hedge funds, credit crisis, the rise of venture capital funds, fund GenY, and the forces of of funds, private equity convergence and funds, commodity pools, divergence have helped to and infrastructure funds, make the industry a sea of as well as to the advisers evolution and opportunity. that sponsor these Integrated teams of investment vehicles. professionals from our Audit, Tax and Advisory For more information, practices are helping to please visit us at: provide clients with an in- www.kpmg.ca depth understanding of the markets in which they operate, and offer strategies spanning the fund lifecycle from value creation to realization.
  12. 12. Olympian L/SEquity Fund, L.P. CHW What is the background to your company and fund? Canadian Hedge Michael J. Levas The Company was founded in 2003 and this is our 2nd long/short equity fund that was launched June 1st of this year. Watch speaks with CHW How and where do you distribute the funds? What is the profile of your current and targeted client base. Michael Levas, CIO, ML The funds distribution is primarily to high net worth and ultra high net worth investors and also institutional investors i.e. fund of funds, family offices and other institutional investors that are looking for alpha in their portfolios. of Olympian Capital CHW What is your investment process? Management about ML The investment process is to capture at least 2 1/2% per trade either on the long or short side. Momentum is also an integral part of the process and hedging instantaneously when a position is either up or down substantially is also something that we look to capture on a daily basis. their investment CHW What is your approach to managing risk? ML Risk is classified and dealt with as a non event. In other words we really don’t use leverage process and at all, we keep a substantial amount of cash on hand at all times so that we can take advantage of market anomalies that we are able to profit from. We do have 4-1 available to us on an intra day basis but is seldom, and I repeat, seldom used. future goals CHW What events do you expect to see in your sector in the year ahead? ML The rest of the year will be essentially a traders market or continuing to be a traders market as it has been since the first part of this year. I believe we will continue to see choppiness and/or possible continued corrections on a fairly regular basis thru the end of the 4th quarter 2010. CHW Are investors’ expectations shifting between capital preservation and growth? If so, how do you deal with this? ML Some investors are looking for capital preservation but essentially the investors that come to Olympian are seeking growth and appreciation of capital and are not really looking for us to minimize or preserve capital as they would in balanced or fixed income portfolios. CHW What differentiates you from other managers in your sector? ML The defining characteristic is information and obtaining information from existing relationships that I have on a worldwide basis in the marketplace. My adherence to risk Michael J. Levas management and in intolerance for sloppy trading that I believe is something that differentiates me from other managers in my style profile. And lastly, my ability to read the tape and my extensive use CIO of options is another defining factor in separating me from the pack.Olympian Capital Management LLC. 10 www.canadianhedgewatch.com
  13. 13. CHW How do you view the environment for fundraising in 2010? CHW Have there been any trends you are watching closely?And does this affect your fund? ML The regulatory landscape here in the U.S. has changedML There is cash available and there are investors looking to place dramatically and I believe this well have an effect on the market andthat cash. The difference is, this year, they are becoming much more due market participants in the years to come so we really need to familiarizediligence oriented and looking for communication and transparency from ourselves with the changing dynamics in the regulatory environment boththe manager. We are continually looking for additional capital into our fund here in the U.S. and abroad.and have been very fortunate this year with our investors and potentialinvestors. CHW What is in the horizon for Olympian Capital Management?CHW How has investor tolerance for volatility and illiquidity ML Olympian’s goals and aspirations are to continue to seek outchanged in the last few years?? alpha, build our fund and separate our thinking, trading and money management from those who seek to just merely make returns that areML I believe that there is a real lack of intolerance for illiquidity and average or below average for their investors.that is more prevalent on the investor’s minds then the volatility. Astraders, we enjoy volatility because it gives us the ability to generate alpha Michael J. Levas, is CIO of Olympian Group of Investment Managementon both sides of the market. Companies. Mr. Levas has been in the investment management business for over twenty years and is the founder, chief investment officer and managingCHW Will “green” investing continue? Expand? Accelerate? member of the Olympian Group of Investment Management Companies. PriorML I think that there will be a certain demand for green investing to Olympian, he was a VP and Portfolio Manager in the Private Client Groupbut again that will be limited in scope to investors that are socially at Lehman Brothers Inc. Prior to that, he was a VP with SG Cowen, UBSconscious as opposed to those that are seeking pure alpha generation PaineWebber and Bear Stearns where he managed in excess of $250 millionand growth. in both institutional and retail portfolios. Michael is the founder and managing member of Olympian Securities LLC, and is a licensed Series 24 general securities principal, Series 7 general securities representative, and a SeriesCHW What are the key elements that you watch? 65, 66 investment adviser representative with (FINRA). Mr. Levas is also theWhat shapes Olympian’s thinking and analysis right now? founder and principal of Olympian Futures LLC, an (NFA) registeredML Olympian’s view is more of a macro view of economic and introducing broker, and a licensed Series 3 associated person.financial events that take place in various markets around the world. Mr. Levas is a frequent conference speaker and commentator on the financialObviously since 2008, we have had a remarkable change in the financial markets and asset management industry, and has been featured in numerouslandscape and our thinking continues to be rather short to mid term in publications including BusinessWeek, Smart Money, Hedge Fund Managernature than more long term as some investors would like to see. And the Week, Absolute Return, Euromoney, International Securities Finance, Buy-reason for that is that because of the increased volatility and the Side Technology, Securities Industry News, Alternative Investment Review,additional quantitative trading that is taking place i.e. high frequency Advanced Trading, Markets Media Magazine, Waters, Bloomberg andtrading we really need to understand the impacts of these traders who are National Public Radio.(NPR)having a substantial impact on markets worldwide. Know your CHAIP C H A R TE R E D TM A LTE R N A TI V E alternatives. I N VE S TM E N T P LA N N E R TM TM CHAIP CHAIPTM is a certification course for the hedge fund and alternative investment industry, D TE RE CH AR RN AT IV E arming Canadian financial professionals – advisors, planners, compliance officers, managers AL TE EN T ST M IN VE PL AN NE R TM and analysts - with the tools they need to make informed decisions in alternative investments. Developed in 2005, the prestigious CHAIPTM designation is earned through a programme that focuses exclusively on Canadian hedge fund and alternative investment strategies, tax and legal issues, with: • Investment strategies, relevant case studies plus legal & tax content written by McMillan • Analytics, Due Diligence and Fit of alternatives within an overall portfolio • Peace of mind for investors through best practices, code of ethics, integrity, professionalism and fiduciary duty To register, call 1-416-306-0151 ext. 2226 or go to www.chaip.com The CHAIPTM programme and CHAIPTM designation is produced by the educational division of Canadian Hedge Watch www.canadianhedgewatch.com Volume 10 Issue 7 - July 2010 11
  14. 14. A R O U N D T H E H E D G E - A Review of Hedge Fund HappeningsGarrison Hill & Redwood Asset Manitou Investment Management AcquiresManagement to Launch Canadas First the Greenrock Global Cleantech L.P.European Crisis Fund Manitou Investment Management announced an extremely positive development for the Greenrock Global Cleantech L.P. Manitou hasToronto - June 24, 2010 – Garrison Hill Capital Management along agreed to acquire the right to manage the LP, from Greenrock Assetwith partner Redwood Asset Management, are pleased to announce the Management, and assume its on-going control. Peter Hofstra willlaunch of Canadas first fund focused on the European financial crisis. continue as the manager of the LP, which will be renamed – theThe Garrison Hill European Crisis Fund seeks to provide investors Manitou Focus+ L.P. and maintain its commitment to deliveringwith the ability to profit and hedge their portfolios from deteriorating superior results by investing in companies with a sustainable/greenpolitical and economic conditions in the Euro Zone. focus. As well, Peter will become Manitou’s Director of Investment Management & Research. As a benefit of working with a larger"Economic and political issues in Europe continue to influence organization, Manitou is reducing the management fee, of the LP, frominvestment returns in other asset classes globally," said Michael Yhip, 2% to 1% effective July 1, 2010.President and Chief Investment Officer of Garrison Hill. "We believethese are structural issues that will take years to resolve and investors Distinct from the LP, Greenrock Asset Management (“GAM”) willneed to manage the risk to their portfolios accordingly. The European continue to operate and focus exclusively on investing in early stageCrisis Fund provides investors a unique investment opportunity and green related companies as we did with Zenn Motors and Catch therisk management tool." Wind. We have hired Chris Seed, an individual with investment banking experience, to support this ongoing endeavour. We continueThe Fund will be actively managed and will use long and short strategies to believe there is tremendous investment opportunity in this categoryin a broad range of asset classes such as currencies, commodities, and are thrilled that Peter will continue to act as a Special Advisor tofixed income, and equities in order to achieve its investment objective. GAM, thereby enabling us to sustain the mutually beneficial dialog thatThe Garrison Hill European Crisis Fund will be available through has developed over the years.Redwood Asset Management. Garrison Hill will act as the solePortfolio Advisor to the Fund. "Redwood is pleased to partner with Sprott Steps Down as Chief, ReplacedGarrison Hill as they have demonstrated the ability to understandcomplicated global events and turn them into distinct investable by Grosskopfideas" said Peter Shippen, President of Redwood. Date: Thursday, July 15, 2010The Fund is currently being marketed to accredited investors only with Author: David Scanlan, Bloombergan anticipated launch date of July 12, 2010. Eric Sprott, whose gold and resource-based hedge funds soared six- fold over nine years, is stepping down as chief executive officer ofMerlin Securities Expands Footprint Sprott Inc. and will be replaced by Peter Grosskopf on Sept. 7.to Canada Sprott, 65, becomes chairman of the company, replacing Jack Lee,Prime brokerage firm Merlin Securities is expanding its footprint with and will be chief investment officer of Sprott Asset Management, thea push into Canada. The firm has recently hired Daniel Dorenbush as Toronto-based firm said today in a statement. Grosskopf joins Sprotta partner and chief executive officer of the firm’s Canadian operation, Inc.’s board and will serve as president and CEO of Sprott Resourcewhich is slated to open later this year, FINalternatives has learned. Lending Corp.In his new role, Dorenbush will be based in Toronto and will report to The Toronto-based money manager’s Sprott Hedge Fund returnedRon Suber, senior partner, head of global sales and marketing. about 496 percent in the nine years to the end of 2009 as bets on goldMost recently, Dorenbush was a New York-based managing director stocks and oil and gas companies paid off.and global head of strategic sales and relationship management in thehedge fund services division at RBC Capital Markets. He had Sprott founded his current money management firm after divestingresponsibilities across electronic, professional and futures trading, Sprott Securities, now Cormark Securities Inc., to its employees.including prime brokerage, soft dollar services, capital introduction Grosskopf is president of Cormark.and RBC’s fund of hedge funds. Prior to that, he was global head ofprime brokerage for RBC Capital Markets. Sprott Asset Management’s senior portfolio manager Peter Hodson will be stepping down from the board, the firm said. Lee will serve asMerlin Securities was founded in 2004 and serves more than 500 Sprott Inc.’s lead director, the company said.single- and multi-primed managers, providing them with an openarchitecture suite of solutions including dynamic performance Sprott Inc. fell 5 cents to C$3.30 at 3:56 p.m. in trading on the Torontoattribution analytics and reporting, seamless multi-custody services, Stock Exchange. The stock has plunged from its initial public offeringcapital development, 24-hour international trading, securities lending price of C$10 in 2008.and access to the Gerson Lehrman Group’s worldwide network ofexperts. In addition to its planned Canadian office, the firm hasoperations in San Francisco and New York. >>> Around The Hedge (continued on page 14)12 www.canadianhedgewatch.com
  15. 15. EMP Exempt Market Products Preparation Course Save $400* off the combined price ofthe Exempt Market Products (EMP) Preparation Seminar and IFSEs EMP Course & Exam (regular combined price is $950) If you have been selling OM products, effective September 28, 2010, National Instrument 31-103 will affect the way you conduct business. You must either pass IFSE’s EMP Exam or the CSI Canadian Securities Course Exam and you must register with one single EMD firm registered in the province(s) you conduct business. Radius Financial Education is offering a 2-day EMP Preparation Seminar, designed to prepare agents for IFSE’s Exempt Market Products Exam. For further information visit radiusfinancialeducation EMP Preparation Seminar dates & locations: • August 9/10 (Calgary) • August 23/24 (Vancouver) • September 20/21 (Calgary) • A PRESENTATION OF *Some limitations may apply, please call for details.
  16. 16. >>> Around The Hedge (continued from page 12) They also need to appoint someone to be a chief compliance officer. That could be the [chief financial officer] or internal general counsel.Q&A: Hedge and Private Equity Funds [But if] it is a very complex organization that is not yet registered, that may mean they need to hire someone for that role.Under Financial Reform LawDate: Friday, July 23, 2010 NLJ What does it mean for lawyers who advise these types of companies?Author: Sheri Qualters, law.comThe financial reform law signed into law by President Barack Obama TB Lawyers who represent hedge funds and private funds will have,on July 21 targets a sector that has previously escaped vigorous at least at the outset, a significant amount of legal work to get theirgovernment scrutiny – hedge funds and private equity funds. The clients registered. On an ongoing basis, compliance is less intensive.Private Fund Investment Advisers Registration Act of 2010, which was Venture capital is a mystery as to how [the SEC is] going to defineenacted as part of the financial reform law (officially the Dodd-Frank that. [But] many funds dont have narrowly defined investmentWall Street Reform and Consumer Protection Act), calls for most strategies; they have more broadly defined strategies that may enablehedge fund and private fund advisers to register with the U.S. them to make investments the SEC may not consider venture capitalSecurities and Exchange Commission. The law exempts investment investments. There may be a whole group of what wed consideradvisers who manage only venture capital funds, but its not clear venture capital [companies that] will be required to register. The SECwhich companies will be exempt from the rules because the SEC has seems inclined to have everyone register. Theyre likely to craft aa year to define whats a venture capital fund for purposes of the law. definition that is very narrow. Law firms that do venture capital fund formation will have many of their clients being required to register.More onerously, companies subject to the act will be required to adoptcompliance programs, tap a chief compliance officer, craft a written NLJ Does the law contain any surprises for the industry?code of ethics and implement policies to curb insider trading. ThomasBeaudoin, a partner in the Boston office of Wilmer Cutler Pickering TB Lets say Im living in Russia and investing in Russian securities. IfHale and Dorr who chairs the firms fund formation practice group, I have U.S. investors with $25 million, Im going to have to registerdiscussed the types of companies that are subject to the law, what it unless I come under an exception. That is going to be a real surprisemeans for overseas private advisers and the laws impact on to [private fund managers] who work outside the U.S. – that the reachattorneys. The Q&A has been edited for space and clarity. of U.S. laws is pretty vast.NLJ The hedge fund and private equity sectors have always been NLJ Will it be a challenge for the SEC to enforce that?considered lightly regulated compared with other segments of thefinancial services industry. Do you consider this the first significant TB I would think it would be. It will also be a big challenge for any non-regulation of these sectors? U.S. based money manager subject to these requirements to register.Thomas Beaudoin There was an attempt to regulate hedge funds by NLJ Do non-U.S. money managers who have U.S. investors typicallyrequiring them to register back in 2004 or so, but that ultimately failed. work with U.S. lawyers now?This is an attempt to get hedge funds and others, including privateequity funds and non U.S. [investment advisers], to register with the TB They should be, if theyre taking U.S. money, they should be.SEC to keep a much closer eye on them. Today, they are very lightly Theoretically, they are at least interfacing with U.S. lawyers if theyreregulated entities, and soon they will be highly regulated entities. conducting any kind of sales activity in the U.S. [But] if youre talking about someone managing $5 billion and taking in a few [U.S.] peopleNLJ The act exempts several categories of advisers, including those [whose investments] add up to $30 million, theres a tendency onwho solely manage venture capital funds or private funds that have some of their parts to ignore U.S. law or not to get a U.S. lawyerless than $150 million in assets under management in the U.S. Given involved.the exemptions, what kind of companies is the act really targeting? NLJ Is advising overseas fund managers a growing legal area?TB Its really targeting hedge funds and most private equity funds. Ithas that under $150 million [language] to exempt smaller buyout TB The appetite of U.S. investors for [foreign investment] products,funds, but its fair to say its looking at virtually all buyout funds. whether were talking a private equity fund that invests in Indian companies or a venture capital fund that invests in Chinese startups,NLJ What legal questions will these types of companies face going theres a very large appetite from U.S. investors for those kinds offorward? products. The role of U.S. lawyers in capital formation projects managed overseas and invested in overseas is becoming much moreTB [First], registering under the act. Its not a difficult process, but its prominent than it was, say, 15 years ago.a process nonetheless. Also, developing rules and procedures arounddifferent aspects of your operations. [Companies now] might not haveas robust a code of ethics or document-retention, conflicts-of-interestor insider-trading policy as will be required.14 www.canadianhedgewatch.com
  17. 17. EXCHANGE TRADED FORUM2010 Don’t miss the ETFsETF event ETNs of the year! Indexing October 25th & 26th, 2010 Structured ProductsToronto Board of Trade - Downtown Centre Closed End Funds Special Keynote Speaker Harry Markopolos “The Madoff Whistleblower” Radius Financial Education is pleased to present Madoff whistleblower Harry Markopolos, author of No One Would Listen, the fascinating true story of how his team’s investigation uncovered a $65 Billion Ponzi scheme, A PRESENTATION OF SPONSORED BY radiusfinancialeducation.com
  18. 18. HIGHWATER DIVERSIFIED OPPORTUNITIES FUND HIGHWATER DIVERSIFIED TRUST FUNDFUND DETAILS PORTFOLIO MANAGERFund Type Diversified North American Active Value Ara Nalbandian, Portfolio Manager, CFA FCSI DMS Ara Nalbandian specializes in absolute return strategies investing in North American securities. He started his career at Richardson Greenshields / RBC Dominion Securities in 1996 and later joined BMO Nesbitt Burns in 1998. He wasAuditor KPMG LLP awarded the Chartered Financial Analyst designation in 2000 and Derivatives Market Specialist designation in 2002.Legal Counsel Borden Ladner Gervais LLP He was most recently Senior Portfolio Manager at Sentry Select Capital Corp. where he achieved tremendous successFund Accountant SGGG Fund Services Inc. between 2000 and 2007. Since December 2007, he has been the Portfolio Manager of the HIGHWATER DiversifiedPrime Broker / Custodian CIBC World Markets Inc. Opportunities Fund.Globefund 5 Star RatingHIGHWATER DIVERSIFIED OPPORTUNITIES FUND LP INVESTMENT OBJECTIVE AND STRATEGYFund Code Class A HCM 100 The funds objective is to achieve consistent absolute returns throughout various market conditions by investingFund Code Class F HCM 110 primarily in the equity securities of mid and large capitalization entities listed on major securities exchanges in Canada December 2007 and the United States. The Manager seeks to maintain a moderate level of risk and reduce the volatility of returns byLaunch Date diversifying its investments by sector, asset class, strategy and other identified sources of risk and by employingStructure Limited Partnership options strategies, short positions, arbitrage strategies and seeking special situations with attractive expected riskValuation Monthly adjusted return parameters. The Manager will employ a disciplined, fundamental, value biased securities selectionLiquidity Monthly (10 days notice) approach with an emphasis on generating consistent portfolio income through varying sources including dividends,Minimum initial investment $25,000 accredited investors income generating option strategies and active portfolio management. A priority is placed on capital preservation $150,000 non-accredited investors engaging in tactical asset allocation and hedging strategies.Minimum investment term 6 months (2% short-term trading fee)Management fee Class A 1% COMPOUNDED RETURNS (CLASS F) as at June 30, 2010Management fee Class F 0% fee based accounts only YTD 3 month 6 month 1 year 2 year 3 year InceptionPerformance fee 15% 3.2% -3.0% 3.2% 19.3% 9.7% - 6.0%High water mark Yes CALENDAR AND MONTHLY RETURNS (CLASS F) as at June 30, 2010Front End up to 3% Year Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov DecRegistered Plans No 2010 3.2% 0.7% 2.8% 2.7% -1.0% -2.1% 0.1% 2009 50.3% 3.2% -3.7% 6.7% 8.2% 9.3% 3.5% 1.7% 3.2% 1.7% 0.7% 4.1% 3.4% 2008 -25.4% 0.5% -0.2% -0.4% 1.0% 1.8% -6.3% -2.3% 4.4% -7.4% -9.6% -11.3% 2.5%HIGHWATER DIVERSIFIED TRUST FUND VALUE OF $100,000 INVESTED $120,000Fund Code Series A HCM 200Fund Code Series F HCM 210 $110,000Launch Date December 2009Structure Trust $100,000Valuation MonthlyLiquidity Monthly (10 days notice) $90,000Minimum initial investment $1,000 accredited investors $150,000 non-accredited investors $80,000Minimum investment term 6 months (2% short-term trading fee)Management fee Series A 1.5% $70,000Management fee Series F 0.5% fee based accounts onlyPerformance fee 15% $60,000High water mark Yes Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10Front End up to 3% Highwater Diversified Opportunities Fund (Class F)Registered Plans Yes (RRSP Eligible) S&P/TSX Composite Total Return Index S&P 500 Total Return Index (C$)TOP 5 HOLDINGS* GENERAL ALLOCATION 25% Long ShortIBM Portfolio Yield 3.9% Long (long call option) Short (long put option)Becton, Dickinson & Co Net Long Exposure 104.0% 20%Cogeco Inc. (including: exposure through options, 15%Telus Corp. bonds, preferred shares and ETFs) 10%Atrium Innovations Inc.*(excluding Diversified) 5% 0%FOR MORE INFORMATION CONTACT: -5% Financial Technology Diversified* Materials Consumer Consumer Energy Health Preferred Telecom Services Estate Bonds & Care Real Shares Cyclical StaplesHighwater Capital Management Corp. -10%Telephone 905.265.0649 -15%Fax 905.265.0646 -20%e-mail info@highwatercapital.comWebsite www.highwaterfunds.com *Diversified: Closed-End Arbitrage, ETF & IndexPerformance figures based on investment since inception December 2007 in Class F units net of all fees and expenses.Information contained in this document pertaining to the Highwater Funds is not to be construed as a public offering. The offering of units of each of theFunds is made pursuant to its respective Offering Memorandum only to those investors in jurisdictions of Canada who meet certain eligibility and/orminimum purchase requirements. Important information about each of the Funds is contained in their respective Offering Memoranda. Eligible investorsshould read the Offering Memoranda carefully before investing. Performance data represents past performance and is not indicative of future performance.Please contact your investment advisor to determine suitability of investment.20 www.canadianhedgewatch.com

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