Arrow Capital Management Inc. of Toronto is living up to its new name with a change in direction. Formerly Arrow Hedge Partners Inc., the Canadian fund-management firm is expanding its presence in Britain through a 50% ownership in wealth-management firm Generation Asset Management LLP. The other partners are the managers of GAM.
GAM is distributing Arrow’s lineup of funds in Britain and the rest of Europe. Arrow’s offering consists of four principal-hedge portfolios that use a fund-of-funds approach, as well as 14 single-manager funds that follow specialized investment mandates.
“We’ve been marketing several offshore funds for some time, but not in an aggressive fashion,” says Arrow founder and CEO Jim McGovern. “The strategy is now elevated and targeted.”
The GAM acquisition brings Arrow’s assets under management to $1.2 billion, about $900 million in Canada and $300 million at GAM. McGovern says that with GAM’s help, AUM could double in a couple of years.
“Arrow has established an in-house capability for evaluating alternative-strategy managers and putting them together in a fund-of-funds portfolio,” says Rudy Luukko, investment and personal finance editor with Morningstar Canada in Toronto. “It makes sense to leverage this capability in Europe.”
Luukko adds that having a base of operations overseas should enhance Arrow’s capabilities in identifying and researching new fund managers it may want to incorporate into its family, as well as in making contacts with institutional clients.
“We have a Rolodex of funds,” says McGovern, “that [GAM] can market to the private-wealth customers.”
GAM’s philosophy is to structure investment portfolios for high net-worth clients using both alternative strategies, such as hedge funds, and regular investments, such as stocks and bonds. The company also markets an emerging-markets investment product that allocates assets among various asset classes.
“When it comes to expanding internationally, you have to do it wholeheartedly or not all,” McGovern says. “The market won’t respond to part-time support.”
McGovern says investors in Europe are “further along the curve” than Canadians in understanding the role of hedge funds in a portfolio. Although many North Americans associate hedge funds with high-risk, leveraged portfolios, hedge funds are actually a useful tool in mitigating risk and achieving positive returns in all types of markets. It was due to some of these negative associations with hedge funds that Arrow Hedge decided to change its name to Arrow Capital.
However, the market crash of 2008 and the ability of some hedge funds to hold up better than market averages during tumultuous times, McGovern says, has created a growing interest in the value of alternative strategies that can perform in down markets.
“People will remember 2008 as a wake-up call when they realized how much money can be lost and how quickly,” says Mark Purdy, managing director and chief investment officer with Arrow. “Investors don’t want to repeat the experience; they want something with a cushion. And that’s why market-neutral and fixed-income products are attracting interest.”
In addition, there has been a growing appreciation by foreign investors of the potential of Canada’s stock markets, which is due to this country’s strong securities regulatory regime, reliable banking sector, stable government and exposure to natural resources investments.
“The Canadian investment story resonates with international investors,” McGovern says. “We are the Switzerland of the investment world. Investors are attracted by our resources story, but then realize they can go beyond that and achieve real diversification with Canadian hedge funds.” IE