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You don't need to be popular to get into Jean-Francois Tardif's good book. He makes a living collecting unpopular stocks with growth potential for his Sprott Opportunities Hedge Fund L.P. He's considered an alternative investment manager because he casts his net wide looking for any kind of stock in any sort of place - as long as it meets his objectives.
"I like to buy growth stocks at value prices" he says. "They're usually unknown." When Mr. Tardif shops for a stock he looks for earnings and sales growth, free cash flow and a "reasonably" low multiple.
As an example, one stock in his nearly $300-million portfolio is the Cargojet Income Fund. Income funds in general have been unpopular since last fall when Ottawa announced an end to their generous tax status by 2011 - but he feels they've been oversold. The Cargojet income fund itself is a provider of overnight air cargo services across Canada. The stock is up nearly 50 per cent so far this year - yet shares still trade at less than 10 times expected earnings. "I like to buy growth stocks at value prices," he says.
Mr. Tardif's quest for alternative investments doesn't end with stock ownership. At any time the Sprott Opportunities Hedge Fund can hold long or short positions in equity or debt, or incorporate other hedge strategies such as pairs trading and arbitrage. That means the fund's investment strategy can be as alternative as the holdings themselves.
Since the fund was launched three years ago it has managed to produce a 31.5 per cent return. In the first four months of 2007 it had returned 7.3 per cent. Although the Sprott Opportunities hedge fund does not follow a benchmark index, the TSX by comparison, grew 11.4 per cent over the past 12 months.
What really sets the fund apart from other equity funds, as well as other hedge funds, is its heavy weighting in short investments. While most long/short funds will keep the short side limited to about 40 per cent of their overall assets, the Sprott Opportunities fund shorts half its assets. For every dollar of equity, 50 cents is shorted. "I'm close to my highest (short position) ever. The markets have gone crazy" says Mr. Tardif.
In most cases, more short positions add more risk to a portfolio because there is no limit to how much you can lose on a short investment. Mr. Tardif attempts to control that risk by diversifying his short positions among 75 positions, which include stocks and indexes like the Russell 2000 and the Toronto Stock Exchange. "At the end of the day the short side is a tool to manage volatility," he says.
That's not to say there are no short positions chosen for the old fashioned reason - to go down. One short position is U.S. steel manufacturer, Nucor. The company is the largest steel recycler in the United States and for that reason Mr. Tardif feels it will be hit hard by an overvaluation in the broader steel sector.
The Sprott Opportunities Hedge Fund is not for everyone. For starters, the fund was capped as of February 2006 but the RRSP version remains open. When it is open the minimum initial investment is $150,000 and subsequent contributions must be at least $25,000. Sprott Asset Management Inc. cautions the fund is only for "sophisticated investors."
To encourage liquidity a minimum investment term is set at a six-month lock-up period and redemptions can only be made monthly with 30 days' notice.
The fees can also get pricey - especially when the fund performs well. It starts with a front end sales commission as high as 2 per cent, a management fee of another 2 per cent and a performance fee of 20 per cent of all net profits. The latest posted management expense ratio is nearly seven per cent.
One other feature mutual fund holders enjoy which hedge fund investors do not is transparency. Strategy is the key to success or failure with hedge funds and managers insist on keeping their cards close to their chests. Top holdings are rarely listed. "You have to understand the strategy and be comfortable with it" says Mr. Tardif.
Dale Jackson has been a producer at Report on Business Television since its launch in September 1999.