Canadian Hedge Fund Expands Offshore to Meet Growing U.S. Demand

(Bloomberg) -- Formula Growth Ltd., a Montreal-based hedge fund operator that has doubled total assets under management to C$1.2 billion ($891 million) over three years, is starting another fund focused on small and mid-sized U.S. stocks to meet growing demand from across the border.

Based in the Cayman Islands, the fund will seek to replicate the Formula Growth Alpha Fund, a neutral approach targeting consistent returns regardless of the direction of the market. The strategy has returned 3 percent this year through May after gaining 8.4 percent in 2016, according to Mathieu Boisvert, a vice president and manager of the C$300 million domestic fund.

“We had some requests from offshore clients to invest, but they didn't want to invest in a vehicle where they'd be subject to Canadian taxes,” Boisvert said in an interview. “Most of them are in the U.S.”

Formula Growth is the latest Canadian hedge fund to seek investors abroad as the $3 trillion global industry, tarnished by poor returns and fund outflows in recent years, recovers some of its luster. Vancouver-based Delbrook Capital Advisors Inc. is also starting a hedge fund in the Caribbean tax shelter in July.

Niche Market

Founded in 1960, Formula Growth manages C$916 million in Canada's hedge-fund industry, which is valued at about C$40 billion. Canadians accounted for 90 percent of the firm's growth in recent years. The new offshore fund, open for business next month, already has a C$50 million commitment from an institutional investor whom Boisvert declined to identify.

By investing in a less crowded market like U.S. small and mid-cap stocks, the company can “find niche opportunities that much larger hedge funds wouldn't consider,” he said. Formula Growth charges 1 percent for management and 20 percent of profit for most of its strategies.

Returns from Formula Growth's four hedge fund strategies this year through May range from 2 percent at the main equity long-short fund to 8 percent at the Hong Kong-based Global Opportunities Fund, Boisvert said. That compares with 2.9 percent generated by the Russell 2000 index of U.S. small and mid-cap companies, and 4.7 percent by the Hedge Fund Research HFRI Equity Hedge Total Index over the same period.

To contact the reporter on this story: Colin McClelland in Johannesburg at cmcclelland1@bloomberg.net.

To contact the editors responsible for this story: Neil Callanan at ncallanan@bloomberg.net, Cindy Roberts, Andrew Blackman