The RBC Wealth Management group, which operates the Royal Bank of Canada Trust Company, recently hosted a luncheon to discuss building wealth through hedge fund investing.
Keynote speakers Charles Seybold of RBC Alternative Asset Management and Lucien Burnett of Saguenay Capital LLC not only informed the attendees of the advantages to hedge funds as investment vehicles, but also dispelled some of the misconceptions about them.
Mr. Seybold said the objective of hedge fund investing was to generate positive returns regardless of the market environment.
Unlike many equity traders who make money in trading fees no matter how a particular stock does on the market, hedge fund managers make money on performance fees.
‘Hedge fund managers are very much incentivised to keep losses at a minimum,’ he said.
Mr. Seybold pointed out that there are many misconceptions about hedge funds. For example, the American Heritage Dictionary’s definition of a hedge fund stated it used high-risk techniques, such as borrowing money and selling short.
Calling the American Heritage Dictionary definition an ‘uneducated one’, he then compared it to an educated one from Bloomberg.
The widely differing definitions help create several misconceptions about hedge funds, Mr. Seybold said.
‘It’s a misconception that all hedge funds are volatile.’
Mr. Seybold also said hedge funds do offer transparency, although not always full and current transparency.
Hedge funds also offer higher returns, but not necessarily higher risk, if they are included in a diversified portfolio, he said.
A portfolio of half equities and half bonds could actually have a higher risk level than return level, Mr. Seybold pointed out, but by adding hedge funds to the diversified portfolio, it would raise the return while lowering the risk.
It is also possible to protect against hedge fund frauds by looking for certain red flags while doing due diligence. Not investing in hedge funds that require only one signatory and dealing with established firms with good reputations were two suggestions Mr. Seybold gave.
Mr. Burnett agreed hedge funds can actually lower investment risk.
‘We believe we’re selling a product that is absolutely risk reducing,’ he said, adding that the hedge fund dynamic was both mathematic and quantitative.
Saguenay does a lot of due diligence on the hedge fund managers it deals with and only chooses about 20 funds of the 15,000 available.
‘We only invest in the most talented people,’ he said, adding that Saguenay needs to understand the investment strategy of a hedge fund manager.
‘If we can’t understand the strategy because it’s too complex, we don’t invest in it.’
Good hedge fund managers will find investment opportunities even when the stock market goes down, Mr. Burnett said.
RBC Wealth Management is headed up by RBC Trust (Cayman) Limited Managing Director Deanna Bidwell and RCB Dominion Securities Managing Director Andrew McCartney. It has more than $500 billion of global assets under administration and $150 billion of global assets under management.