Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 21 - Evidence - April 26, 2007
OTTAWA, Thursday, April 26, 2007
The Standing Senate Committee on Banking, Trade and Commerce met this day at 10:50 a.m. to examine and report upon the present state of the domestic and international financial system. Topic: Study on hedge funds.
Senator Jerahmiel S. Grafstein (Chairman) in the chair.
[English]
The Chairman: I want to welcome you, gentlemen. You are part of our continuing study in the hedge funds. We are being seen from coast to coast to coast by television. We are also being covered by the World Wide Web. I also want to welcome our audience from across Canada. The Standing Senate Committee on Banking, Trade and Commerce was in New York City last October to have an intensive discussion about a number of issues within this committee's mandate. We are here to consider hedge funds, a new financial instrument and a new financial vehicle that has been growing like Topsy. During our discussion with the U.S. regulators and representatives of the financial services sector, hedge funds emerged as a key issue. The sector was valued at that time at approximately $1.1 trillion in assets globally. Since that time, the newest numbers we have received show it exceeds $1.7 trillion, larger than most economies in the world. Canadian hedge funds were estimated at $26.6 billion in 2004. We know it is a much larger number, but frankly we have not been able to put our mind around what the exposure is from the Canadian aspect in terms of Canadian assets.
We also heard about hedge funds during our recent study of the consumer issues in the financial services sector. In our report on this topic, we recommended the appointment of an eminent person to review appropriate regulatory oversight of hedge funds. Nevertheless, a key question remains regarding the extent to which and how, if at all, these types of financial products should be regulated or supervised to protect consumers, as well as the systemic stability of the domestic and global financial markets.
Today, I am delighted to have with us, as senators, my distinguished co-chair, Senator Angus, who will be the lead questioner. To the right side, but not necessarily to my right, is the distinguished investor and senator, a corporate guru, Senator Eyton. To my left is Senator Goldstein, an expert in law, especially in matters affecting bankruptcy. Next to him is one of our outstanding senators from Nova Scotia, Senator Moore, a long standing senator of this committee, well versed in all matters pertaining to the Maritimes, particularly his own province of Nova Scotia. A more recent addition next to him is Senator Ringuette from New Brunswick. We welcome her. She will play an increasingly important and increasingly visible role in this committee.
Last but not least, Senator Biron, a modest man, is an outstanding businessman and has more knowledge of business practices than anyone in the Senate.
You have a distinguished and eminent group of senators here to listen to your every word. From the Ontario Teachers' Pension Plan, one of the largest funds in Canada, we welcome Ronald Mock, Vice-President of Alternative Investments. We also have here, Neil Petroff, Senior Vice-President, Tactical Asset Allocation in Alternative Investments. How do you say that at night before you go to bed?
Anyway, I understand, Mr. Petroff, you will proceed. We have ample time, but I can tell you the senators are well versed on a number of these matters and we shall have penetrating and provocative questions.
Neil Petroff, Senior Vice-President, Tactical Asset Allocation and Alternative Investments, Ontario Teachers' Pension Plan: It is my pleasure to be here today and have the opportunity to share views and provide information to this committee regarding hedge funds. We, at Ontario Teachers' Pension Plan, have been involved in this type of investment since 1996 and have been a leading investor, globally, in this area.
In the next few minutes we intend to highlight what motivates a plan such as ours to invest in hedge funds, and key issues we see facing many institutional investors in the industry today.
I do not need to introduce us. You have done a good job. We represent Ontario Teacher's Pension Plan Board, which is based on 50-50 ownership between the government of the province of Ontario and the Ontario Teachers' Federation. We are a private pension plan managed to find retirement income for 271,000 Ontario teachers or former teachers. The current asset of this plan is $106 billion. The Ontario Teachers' Pension Plan employs 582 staff, of which 179 are focused on investments. Today, the Ontario Teachers' Pension Plan has approximately $9.6 billion, or roughly 9 per cent of the pension plan invested in hedge funds. These hedge fund investments are global, stretching from Asia to North America, including South Africa and South America.
To provide context to our presentation, the asset management industry broadly considers alternatives to include private equity, infrastructure, real estate, commodities, timber, and finally, hedge funds. We will focus our remarks today on hedge funds.
Why does Ontario Teachers' invest in hedge funds?
As the Nobel Prize winner, Harry Markowitz, showed in his paper, ``Portfolio Selection'' back in 1952, diversification of returns is one of the critical determinants of portfolio success. By success, we mean the ability to earn the required level of return over time while managing portfolio risk.
Herein lies one of the two major attractions of hedge funds to institutional accounts. The first benefit is that they act as portfolio risk reducers. Hedge funds can provide returns that do not go up or down with other investments such as stocks and bonds. Hedge funds offer correlation benefits to any portfolio. There are many different hedge fund styles to choose from, which result in a diversified portfolio of returns, not readily available from other investments.
The second major attraction of hedge funds for a plan such as ours is the excellent returns hedge funds offer, per unit of risk.
In this context, we are referring to the risk of the variability of returns over time. As an example, investing in any stock market index, you will receive $1 of return for every $2 of risk.
Hedge funds, on the other hand, because of their inherent characteristics, can provide a better risk-return ratio, namely $2 of return for every $1 of risk, the opposite of simply buying a passive stock index.
Like everything, however, there is never an advantage without a disadvantage. The great diversity of hedge funds to choose from, which is the advantage, means they are varied, complex, unique and require specialized skills to invest in them. These characteristics are also their disadvantages.
There are approximately 8,000 hedge funds globally. Not all are created equal or provide the same benefits cited above. The dispersion in quality, style and returns is immense.
The Ontario Teachers' Pension Plan invests in a subset of these 8,000 funds, which, we hope, are worthy of institutional assets, are profitable, meet our diversification and due diligence criteria and offer a low variability of return. Typically, they are arbitrage or stable-cash-flow funds.
Many hedge funds, and often those funds that provide media with the attention-grabbing headlines, are not the ones of interest to institutional investors. Widely varying and eye popping returns are not what institutions typically look for.
Investing in hedge funds requires an extensive amount of expertise including market experience, international finance, advanced mathematics, legal expertise, derivatives experience, portfolio construction and operational finance, to name a few.
Institutions often have, or hire, teams of specialists to conduct the necessary due diligence prior to investing in a hedge fund, and for ongoing monitoring.
Mitigating business risk, operational risk and market risk in these types of investments is critical. Hedge funds are rapidly evolving into strategies that no longer represent the simple equity hedge funds of yesterday. Indeed, some argue that the precise definition of hedge funds is difficult at best. We often describe them as private pools of capital. Strategies and investments executed by hedge fund managers are expanded significantly beyond those of years ago, and they will continue to change.
At one end of the spectrum, hedge funds can be as simple as equity long/short funds dating back to the 1950s, or as complex as multi-strategy funds who invest in private equity, infrastructure, insurance, drug royalties or even aircraft leasing.
Hedge funds now invest in both public and private market transactions. The trend for hedge funds to invest in private market transactions is only accelerating. Regulating these private pools of capital as if they are like public mutual funds will not be an easy task and perhaps even an illusive one. Many hedge funds now look like miniature versions of investment banks or investment bank proprietary trading desks.
It is important to note that the recent study published by École des hautes études commerciales, EDHEC, Risk and Asset Management Research Centre, entitled Quantification of Hedge Fund Default Risk, showed that a greater source of investment risk investing in hedge funds is operational risk, not market risk. By this we mean security settlement problems, valuation and accounting issues or fraud. While it is most common for regulators and the general population to worry about and focus on market risk, operational risk must be elevated in importance. These sentiments have been echoed by other regulators currently looking into hedge funds.
This same study has shown that, in the case of hedge fund blow-ups, operational risk exceeds investment strategy risk in more than half the collapses. Consequently, a critical area of our due diligence involves the managers' operational environment, namely independence of security and fund valuation; independence of reporting; and independence of administration.
This point leads us to one of the most important issues facing institutional investors today, and that is the issue of portfolio transparency. We believe it is necessary to have access at some level to a hedge fund manager's portfolio holdings to fulfill our fiduciary duty. This transparency, however, may take many forms. Regardless of the approach to transparency, we need it at some level. If we do not have it, we will not invest.
Concerning regulation of hedge fund managers, institutional investors or exempt investors will have oversight, legal remedies and due diligence processes in place to execute their fiduciary duty when investing in hedge funds, private equity, infrastructure, timber, real estate or other widely defined alternatives. Sophisticated market participants operate with tools available that retail investors do not have at their disposal.
We believe that exempt or accredited investor exemptions are a critical aspect of capital market dealings and securities regulations for us to maintain.
Our concern, as it relates to the complex world of hedge funds, is that in an attempt to provide retail investor access, ill-advised, rash or overly burdensome regulations may impact the hedge fund industry's growth negatively, or more likely, drive it to more favourable jurisdictions. We believe the committee needs to keep in mind firmly the current regulatory structure, which acknowledges and supports the difference between public markets under full disclosure, and private markets, caveat emptor, while recognizing the non-exempt, retail, and the exempt participants in the market.
This concludes our opening remarks, and Mr. Mock and I will be happy to answer questions.
Senator Angus: Welcome, gentlemen. It is always a privilege to have a discussion with the gentlemen from the teachers' plan. You seem to be in the news these days. I hope we have not taken you from other interesting activities this morning.
We are looking into hedge funds more from a Canadian point of view and a Canadian investor point of view, consumer protection, but we recognize that it is now a global business. We have had witness after witness tell us that our lending institutions, and other major institutions like yourselves, will turn up in hedge funds all around the globe. We understand that.
You indicate that you have a fairly substantial investment, $9 billion I think you mentioned, in hedge funds.
Apart from the criteria you apply in choosing those investments, is there a common thread amongst the different hedge funds you invest in as to the degree of leverage employed or involved in those hedge funds?
Ronald Mock, Vice-President, Alternative Investments, Ontario Teachers' Pension Plan: The leverage in any hedge fund varies dramatically from style to style. Many hedge funds operate in public markets. As a consequence, they must operate within market limitations and, therefore, that can limit their leverage potential.
On the other hand, many hedge funds with different styles, unique styles, employ derivatives. Derivative contracts interface with banks and styles that may deploy more leverage than might be available to an equity hedge fund manager.
When questioning the amount of leverage that hedge funds employ, the answer is conditional on what style you are speaking about. Having said that, various studies through time have looked at the amount of leverage that hedge funds employ, and on average, across the entire hedge-fund universe, it is something of the order of 1.5 times or 1.75 times.
Fixed income strategies — swaps, bonds, credit derivatives and things of that nature — can employ significant leverage: five times, ten times, twenty times, some even higher. On the other hand, equity long/short funds will typically max out at two times leverage.
Coming up with an average across the industry is a difficult task, but it is one of the two degrees of freedom that hedge funds employ. A mutual fund manager can be long in stock or in cash. Those are the two things that they basically can do. Hedge fund managers have two more degrees of freedom. They can go short or they can employ leverage, typically. From an investment perspective, these extra degrees of freedom, in part, give hedge funds their unique response characteristic.
Leverage is an important point in the hedge fund world. Like any institution in banking or in the corporate environment, leverage can be utilized to a great end. In some cases, however, whether in hedge funds, stocks or anywhere else, excessive leverage can lead to problems. It is not unique to the hedge fund world.
Senator Angus: In terms of the investments in hedge funds that the Ontario Teachers' Pension Plan currently has on its books, is there a common thread? Are there more of the equity, standard kind of fund or are there more derivative style funds that grow from 5 per cent to 20 per cent?
Mr. Mock: Our investments would be closer to the lower end of the risk spectrum.
Senator Angus: Your answer, Mr. Mock, raises a question that was put before the committee yesterday by a gentleman from Toronto who is an alleged expert in the area, Eric Sprott of Sprott Securities. We had an interesting exchange with him. He asked us to be sure that, when using the generic term ``hedge fund,'' we distinguish between the more standard type of equity fund and the derivative financing vehicles — trading in structured market products of leveraged debt. Do you have an additional comment in that area? This committee must look at both to determine what we perceive to be potential risk for Canadian investors, generally.
Mr. Mock: I think Mr. Sprott's comments are absolutely correct. Not to make your task even more insurmountable, however, the distinction is more fundamental than that. One of the greatest difficulties that you will find yourself bumping into as you look further into this subject, and hear greater testimony from many people, is today's definition of ``hedge fund.'' Recently, in Goldstein v. Securities and Exchange Commission, in the United States, one of the most critical issues revolved around the definition of ``hedge fund'' and how it is different from private equity or many other private pools of capital. At one end of the spectrum, you have equity funds, and at the other end of the spectrum, you can have hedge funds that invest in aircraft leasing and insurance. They really are opportunistic pools of capital that move rapidly in terms of where they invest.
There is huge discussion in the marketplace today about structured market products and the leverage they employ. I agree that we are at a stage in the market cycle whereby much leverage in these structured market products is significant. Having said that, it is important to understand that although hedge funds utilize them, those products are not created necessarily by hedge funds and they are not necessarily bought by hedge funds. There are many, many groups in the market that become involved in the purchase or acquisition of parts of those kinds of structured market products, and so it is not specific to hedge funds. Looking at this structured product world through the eyes of the hedge fund world will allow you to see only a portion of the structured market products that is available. I agree with Mr. Sprott that of that particular market, we must be mindful at this stage in the cycle. On the other hand, hedge funds are a part of it but they are not the only part, and they might not even comprise as much as 50 per cent of those that are acquiring and purchasing those kinds of structured market products that are created, issued and sold by banks all around the world.
Senator Angus: That is interesting. Your document mentions that investing in hedge funds requires an extensive amount of expertise. It is obvious to us from what we have heard to date that it is a complex area of investing, and your last answer underlines that sentiment. In terms of any regulatory or oversight measures that we might recommend as a result of our hearings, we have been thinking in terms of the definition by the Investment Dealers Association of Canada, IDA, of ``accredited investor.'' However, you said that investing in hedge funds requires an extensive amount of expertise in the markets, international finance, advanced mathematics, legal experience, derivatives experience, portfolio construction and operational finance, to name only a few.
The Chairman: This investing is not available to our mothers directly.
Mr. Petroff: My mother would not know much about hedge funds. The point is when dealing with retail investors, understanding the product will be a challenge.
Senator Angus: That is where I am coming from.
Mr. Petroff: As an accredited institutional investor, the Ontario Teachers' Pension Plan, OTPP, must exercise fiduciary its responsibility. We must see what positions go on at the level of the individual hedge fund manager. We have transparency in different forums. Some transparency is right on our computer screens and other is ``for your eyes only,'' so we physically go to see them. We have to see it in their shops any time we go.
I always think of hedge funds as not an asset class but as a group of trading strategies whereby the investment sits between fixed income and equities, and between the capital structure in a corporation — the senior debt, the subordinated debt, preferred shares and common shares — and the related strategies. We are finding arbitrage, and the funds in which we invest are low risk, we believe. They are arbitrage or convergence trades that ultimately receive a stable cash flow.
In understanding the retail investor grappling with the complexities of these strategies, I find that diversification is usually such that if they do not like the risk in stocks, they can move into fixed income, and if they do not like the interest rate risk, then they can move into cash. We look at hedge funds as cash on steroids where we plan to earn a return above cash of about 5 per cent. That return does not seem like much but that 5 per cent value-added is transported to the entire OTPP portfolio, and because of the correlation benefit, it makes the entire portfolio a bit lower risk while achieving a better return.
If I were a retail investor, I would have difficulty doing the ongoing operational due diligence of any individual hedge fund. Even fund-of-funds investing, which is one level up, at times does. It is opaque to them so to put that extra layer of management and fees on the retail investor is not necessarily helping them to know what is going on.
Senator Angus: That is exactly true, especially in today's environment with all the factors. Yesterday, the Dow Jones Industrial Average went through an historical benchmark at 13,000. Mr. Sprott told us about a phenomenon called ``lending mania'' and the large amount of cash out there. It brings to mind Mr. Greenspan's comments around March 2000, or earlier, when he talked about exuberance and everyone wanting to get in on the action. The poor retail person was about five years behind the curve but is now hearing about these premium returns. The retail investor is likely wondering, why not get in on the action to have a chance at these higher 20 per cent to 30 per cent returns on investment. The folklore is evolving. It seems like such a no-brainer that we are almost tempted to prevent the retail investor from entering the area. Do you agree?
Mr. Mock: Picking up on the point that you referred to earlier in our opening remarks, when, as an institution, we conduct due diligence on a hedge fund, we cited many things involved in that process. There is a difference between conducting due diligence on one equity long/short hedge fund and conducting due diligence across some 30 available styles in which to invest under the hedge fund umbrella. We were not kidding when we said that all that expertise must be brought to bear. At the Ontario Teachers' Pension Plan, some people that are part of the due diligence team might have PhDs in mathematics for assessing highly complex strategies, others might have extensive credit backgrounds and others still might have bank lending backgrounds to look at other styles of hedge funds. One of the biggest issues we look at is whether a fraud could be perpetrated, which is an important issue. Mr. Petroff referred to that issue in his opening remarks. EDHEC has stated that it is probably one of the bigger risks inside hedge funds, bigger than market risk. From that perspective, we have people who are accountants, former auditors and forensic accountants to determine whether the money invested by the Ontario Teachers' Pension Plan could find its way outside a lock box where it is heading in a direction that it is not intended to go.
We do not operate in the sense of one person going out to have a quiet afternoon chat with a hedge fund manager to see if we want to invest. The due diligence process can take as long as three to six months, and longer at times, with a team of 10 to 15 people with varying specializations brought to bear on the issue.
When you inquire about our thoughts on whether retail investors should be involved in this investing, our view is that by replicating these kinds of skill sets to conduct appropriate and deep due diligence, like most institutions do when it comes to private equity investments, infrastructure investments or any other large private investments, the retail investor would find it difficult to access, deliver or have these kinds of skills. In fact, many retail investors might find it difficult to access some of these managers. I would go so far as to say that many hedge fund managers might not want retail investors involved in their funds. When they employ complex strategies, which is a benefit to markets and to market efficiency, it helps to have investors who understand such strategies, and who have the capacity to follow them along in their strategies rather than to have to explain some of these things that, unless investors have the relevant background, are not simple to explain.
Mr. Petroff: I will add a point. The fees that retail products offer are such that when the lower risk strategies offer, for example, T-bills plus 3 per cent to 5 per cent, all that percentage will be eaten away. At the end of the day, that investor receives no better return than regular T-bills interest rates, while assuming all the risk of fraud and having poor performing hedge funds. Of the 8,000 hedge funds in the market, we have about 200. These funds are at the low- risk end of the spectrum — convergence trading — and we believe in stable cash flows. You talked about returns of 20 per cent to 30 per cent, but we do not see those in our portfolio because many of them are market risks that we do not want to assume. We have so much market risk in our entire portfolio that we are seeking pure value-added, or pure alpha, without the market returns, or beta.
I look at the fees even on mutual funds that eat into investor returns, and at the hedge fund manager's fees, the fund- of-funds manager's fees, as well as the fees on principal protected notes. All those fees can cause investors to think they could have bought bonds and done better. Institutions could negotiate better fees and even better side letters that provide certain rights. I do not think the retail clients could even attempt to negotiate a side letter on preferential treatment.
Senator Goldstein: Thank you for your fascinating and useful presentation. We have heard a great deal about systemic risk, transparency and disclosure — all the buzz words. Clearly, in your position you have created de facto your own fund-of-funds and dealt with the hedge — I use that term generically because hedge funds is a misnomer nowadays — you have created your own useful risk vehicle for purposes of your huge fiduciary responsibilities. You have about 10 per cent of your aggregate assets there.
We also heard you and others speak to the fact that the retail investor, even the sophisticated investor and the one who qualifies as a sophisticated investor, is a cork bobbing in a sea when it comes to these kinds of investments. Retail investors do not have the skill set required for even a modest understanding of what is happening to their investments. That situation concerns me a bit more than anything else causes me concern. To the extent that the leveraged part of that hedge fund, generically speaking, is offered by self-regulated banks that watch what is happening to the money they lend, and perhaps a self-corrective is built into the system, the sophisticated individual investor is not at the mercy of a market-driven supply-and-demand system but rather is at the mercy of a risk-assessment-driven supply-and- demand system. That is different from the classic market.
I am a bit worried about what happens to even the sophisticated investor. I am also a bit worried about the non- sophisticated investor, who might buy 100 shares of BCE or other classic conservative shares. Again, the value of that investment is not driven by what we used to consider the normal market but is driven artificially by a demand process that is not necessarily the simple, usual market demand process. Can you enlighten us about the risks to the individual investor, sophisticated or not, in the context of the increasing activity of the hedge funds? I understand that 3 per cent to 5 per cent of the New York Stock Exchange volume each day is hedge fund purchases or sales. That is huge.
Mr. Mock: There are many points inside the comments you made, but I will try to tackle about three of them.
I will come out squarely on the side that hedge funds are good for markets. They are good for markets because they increase market efficiency and transfer or move capital into areas sometimes where capital is hard to come by. They are good for markets, they serve markets well and under normal conditions and operations they are things we want to have. That is the first point.
The second point is, in terms of the market, the impact on the market and how it affects the retail investor, when people invest in public markets whether in stocks or bonds, takeovers of companies — company acquisitions — through capital market regulation has been going on forever. It is not new news. It is out there. It is well governed. Capital market requirements are in place that everybody must follow, and it is a public disclosure, full disclosure, mind-set from a regulatory perspective.
Unless something has changed, earnings, book value, how corporations act, still carries the day in terms of investing over the long haul. I do not think hedge funds in any way, shape or form impact that and impact the way in which public markets operate. The U.S. Securities and Exchange Commission, SEC, the Ontario Securities Commission, OSC, and the Financial Services Authority, FSA, in London, have that well nailed down and well under control.
Where I think things are changing, and this becomes an important point, is the distinction between public market activity and public market regulation, where the philosophy, by and large, has been full disclosure, versus the private market, sophisticated market, exempt investor market, which is pretty much caveat emptor. We cannot lose sight of these two philosophies in here.
The problem is coming in, in that hedge funds used to be involved in public market trading, but with two more degrees of freedom. They could employ leverage and go short. Hedge funds are now part of the private marketplace. They are part of the private marketplace, but they now extend the kinds of things they do within that private marketplace. As we saw with the SEC's attempt to regulate this end of the private marketplace in the United States, it ran into difficulty. One reason it ran into difficulty is because it tried to differentiate between private equity on one hand and hedge funds on the other hand by bringing into play a definition that a hedge fund is two years less a day and private equity is something where investors are locked up for longer than two years.
The crux of the issue that regulators must deal with right now is that they are private pools of capital, they evolve rapidly, they operate in the caveat emptor part of the market as opposed to the true, full and plain disclosure part of the market, and they are hard to define, regulate and stay on top of.
A concern about leverage that typically comes into play here is, can structured products, over-leverage and too much lending blow up the markets? How will it affect long-term capital lending? All these market issues permeate the discussion on hedge funds. The reality of the situation is that the best way to look at what hedge funds do in the marketplace is where they all come together, and where they all tend to come together is largely through the investment dealers and the banking community. They are already regulated. They are already well overseen and watched. A good form of regulating the activity of hedge funds is through an already in-place vehicle.
When it comes to the retail investor — and I will preface this remark by saying we are not retailer investor experts, so we give you only some preliminary thoughts — given the expertise that is required to look into and monitor hedge funds, it will be difficult for the retail market to invest in hedge funds. Definitely, retail investors cannot do individual due diligence.
I will come back to your point about the sophisticated investor. Individual sophisticated investors that can meet the exempt criteria, whatever that is, do enter the marketplace. There is no question about it. Investors with $150,000, in the U.S. or $2.5 million will enter the marketplace, but they will probably tend to stay at the end of the marketplace that is readily understandable. That end of the marketplace buys and sells stocks, maybe buys and sells some fixed income products or a bit of credit or high yield.
It is important for the committee to understand that although that marketplace is a good chunk of the hedge fund industry, the hedge fund industry has extended itself way beyond that, significantly beyond that, into much more esoteric products. The industry continues to evolve. We have hedge funds involved in intellectual property and music publishing rights. We have hedge funds involved in aircraft leasing. We have hedge funds involved in purchasing and buying drug royalties. This activity is not public markets kind of stuff. The expansion of these strategies in a private market context has had a significant impact on what we would call a hedge fund globally going forward.
Senator Goldstein: I heard two things that in my mind are contradictory. Perhaps you can clarify them for me. On the one hand, you agreed with what I said earlier: The lenders who provide the leverage are themselves regulated and therefore one can say, within the system there are correctives that are protective in their nature.
On the other hand, you said that funds — I do not want to call them hedge funds anymore, because they become different — are investing in more and more esoteric products. If I understand you correctly, that investing may indicate a certain amount of concern and risk. Is there a dividing line or does there need to be a dividing line?
We are trying to grapple with the extent to which, if any, some type of regulation is appropriate or inappropriate. We heard both of you say that regulation is probably inappropriate because regulations are already there.
These products are becoming more and more sophisticated. Individual investors, although they are made aware of the fact that they must be careful about what they are doing, nevertheless are involved. They are involved in these sophisticated things. Is there not some kind of protective, disclosure or educational kind of tool that is necessary to warn them?
This is a free society. They can have $2 million and do what they want with it. If they did not steal it, it is theirs. If they want to buy something that is silly, it is their privilege and their problem. Is it really a free market in that sense, or should we do something to let people know that they are playing with fire, as apparently they are?
Mr. Petroff: We have been investing in hedge funds for 11 years and we are still learning. We plan to continue our learning process. When people ask me what I do, I can give them a bit of an idea, but the information only scratches the surface. A little knowledge is dangerous. By giving someone a little knowledge where it scratches the surface, they say, I think I understand it. They then take their hard-earned dollars and invest in something they know little about, and I think they may be disappointed.
The education is ongoing, and I am not sure the current framework of brokers that make money by selling products is the one to teach them.
When I started, my broker said, ``Buy this stock: It is good.'' I bought it and it went down, but the broker made money. In hedge funds, the same sort of thing will happen. It is a challenging area for the long/short managers, the convertible bond managers and the arbitrage managers. Each individual kind of strategy investors can understand, but those strategies are evolving. They come in and out of favour. The non-exchange-traded hedge funds will be the ones to grow in the future.
There is one other interesting sideline. Equity markets have a risk premium so that if investors buy stocks there is a point where they should earn a risk premium over time. The hedge fund market is an adversarial game where there is a winner and a loser. It is a zero-sum game but after fees it is a negative-sum game. By definition, for this hedge fund to win someone else must lose. That is why the stock market is such a good place. Over a long period of time, investors will earn a risk premium. That is not necessarily the case in these kinds of strategies.
The Chairman: Mr. Petroff, you made reference to a recent study published by the École des hautes études commerciales Risk and Asset Management Research Centre. Our tradition is if people refer to a study, we like to take a look at the study itself. Is it possible to get us a copy of that study so we can take a look at it?
Mr. Mock: I have one here today.
The Chairman: Thank you so much.
Senator Eyton: You mentioned in your opening remarks that you are in hedge funds, but on a global basis, certainly not in Canada.
Is there anything that you might describe as a Canadian hedge fund industry that could be seen as a separate overall undertaking?
Mr. Mock: There is a Canadian hedge fund industry, and it is growing. It is vibrant, healthy and getting better every year.
It is still less than 2 per cent of the hedge funds, globally. On the world scale, it is still relatively small, and, until recently, it has tended to be dominated by people who are doing equity long/short trading. This type of trading is probably one of the most basic approaches and styles in hedge funds. Recently, it started to change and will continue to evolve, as it is evolving in Asia, South America, Europe and elsewhere. There is definitely a Canadian hedge fund industry. It is growing continuously and doing well.
Senator Eyton: Does the Canadian industry, as it is developing, share the same characteristics as in other countries such as the U.S., U.K. or elsewhere? Might we be comforted in some way that we are a little more conservative, a little less exposed?
Mr. Mock: The first point is that I am not sure comforting is required here because the perception of the risk is out of proportion with what many legitimate and good hedge fund managers are all about.
I do not know that comfort is required here necessarily. The perception of hedge funds being risky is not misplaced but we look at hedge funds as risky probably because they are less understood than most investments. Should we be more concerned about hedge funds than we are about an Enron, Bre-X, Tyko, or anything else that might be out there, at any point in time?
The fact that hedge funds employ leverage tends to make people concerned, but oftentimes the way leverage is employed in a hedge fund is a little different than most people would consider.
Fundamentally, the Canadian hedge fund industry will evolve and develop as it has in Europe, the U.S., and elsewhere. There will not be any exception. Ideas on how to make money move rapidly around the planet these days and if a new strategy comes out in the U.S., it is not long before somebody in Canada, London, Singapore, or Hong Kong for that matter, will understand that strategy fairly rapidly.
Looking around the world, it is interesting to note that the hedge fund industry has grown rapidly in the U.S., and rapidly in London in particular. That growth will continue going forward. At some point, we need to separate these various tensions about hedge funds into their proper buckets. One of the critical buckets is market risk. People worry about the leverage, long-term capital, things that are big and scary and amaranthine. Those sorts of things all come to mind. That kind of risk is probably best addressed, in my view, through the bank regulation sector, the bank regulatory world and the securities dealers' regulations. They will have the best opportunity to regulate those kinds of market concerns most efficiently: fears, many people worry about. That is one tension, one area of regulation that makes a lot of sense to us.
On the other hand, the other area of tension and regulation is, should retail investors be allowed to move into this area, and should hedge fund managers be regulated?
My concern is that overly burdensome regulation of hedge fund managers will be like stepping on an air mattress. We might step on it on one part of the air mattress, and it will move off to some other location.
Senator Eyton: Can you cut that in two? You paired registration with overregulation. Would you, for example, accept that registration of administrators or managers might be a good thing?
Mr. Mock: The way the FSA and the SEC are considering looking at things now, both in slightly different directions, is to take a considered approach to this part of the private market world. The FSA in London has held back bringing lots of regulation into this area. They require all managers to register with the FSA, but the manner of regulation is a much lighter touch, which has been a view mentioned by regulators in the U.S.
The SEC is coming down clearly on the side of private markets as well by segregating private markets and accredited investors from the retail part of the world. It is important in Canada that we do not rush into an overly burdensome regulatory environment in the world of hedge funds but continue to acknowledge that they are predominantly private investment vehicles, and that status will be hard to shift.
If you asked many, many hedge fund managers if they wanted retail investors in their fund, you would probably be surprised to find that it would be a minority, definitely a minority.
To regulate hedge funds on behalf of the retail investor and to provide the retail investor with access to them may serve the purpose of regulating hedge funds but if you asked hedge funds if they want a huge proportion of retail investors in their funds, the vast majority would probably say no.
Senator Eyton: It seems to me you could divide hedge funds into those that dealt privately and those that dealt at the retail level. The ones that choose to deal at the retail level should have different requirements than the ones that deal with sophisticated investors.
Mr. Mock: That sounds reasonable and I would agree with something like that. However, you may find that the very benefits that all the regulators have seen that hedge funds can bring to a portfolio, diversification and all sorts of benefits, may not appear because only a small section of the hedge fund world would deliver their hedge funds to the retail market.
The Chairman: Are you suggesting that the rates of return would be different?
Senator Massicotte: It does not matter.
Mr. Mock: I am not saying that the rates of return would be dramatically different but rather that only a small subset would access the retail market for funds. The other issue is that globally, institutional private-money investors for pensions, endowments, et cetera, are showing up to provide hedge fund managers with capital. Investors are lined up at the private market level. Hedge fund managers are not starving for assets.
The other critical point to understand is that mutual fund and asset managers can manage $10-billion to $100- billion accounts because they are scalable. Hedge funds are not scalable investments. Many $200-million hedge funds will close and take no more investors. There are some at $1 billion and some at $10 billion but $200 billion and $300 billion in hedge funds are not floating around the marketplace. A large hedge fund would have $20 billion and you can count the number of them on two hands. These strategies are not scalable to take in retail investors all over the world. You cannot run a parallel thought process between hedge funds and the mutual fund industry. Where the mutual fund industry can grow and come up with products such as exchange-traded funds, ETFs, where billions can be invested around the planet, hedge funds do not work that way. As private equity is not as big as the mutual fund industry, so too the hedge fund industry is not as big as the mutual fund industry.
In fact, $1.5 trillion to $1.7 trillion under management sounds like a great deal of money in the hedge fund industry, yet it is less than 5 per cent of all the assets that are under management globally. It is still a small proportion of the asset management world.
Senator Massicotte: I will speak to the same line of questioning as Senator Eyton. I will go back to the basics. Our purpose is to determine whether we should regulate or provide structure, and should the government or regulators become involved?
The starting point is sophisticated investors who can protect themselves from creditors, and then we have retail investors. Your summary is excellent: caveat emptor for the larger ones and try to have Big Brother overseeing and helping the retail investor; and we do it by way of prospectus. While you said that not many people would want to offer retail product, I presume you still agree with the prospectus approach. Regulation should not inhibit hedge fund providers to retail investors, subject to prospectus. Do you agree with that? Returns might not be adequate and there might not be many providers but, from a policy sense, I presume that you have no objection to that kind of policy or regulation remaining in place. Am I correct?
Mr. Mock: Once again, we are institutional investors and we are not experts in retail regulation. Having said that, for hedge funds that choose to provide access to retail investors, I recommend they be subject to all the same kinds of public disclosure issues that would be required. You might find yourself getting into difficulty if you put an intermediary with the expertise to look at these strategies between the retail investor and hedge funds. The person would be a fund-to-funds kind of intermediary. Then, you would need to be careful that the fund-to-funds stayed tightly within a range of what they were doing. If you were to wake up one day and take a regulated fund-to-funds business and allow it to invest in all kinds of unregulated or lightly regulated hedge funds, you might create a disconnect between the kinds of things they are investing in versus the kinds of things that a retail investor might think they are investing in.
You would bridge the two, in a way — the caveat emptor market with the full disclosure market — by putting in place such an intermediary. It would be akin to someone setting up a fund-to-funds for private equity of some kind and, thereby, linking the two markets with someone standing in the middle.
It is an interesting concept that many regulators seem to be pursuing. Having said that, because they are not necessarily allowing direct access to the retail investor to this more exempt private market, you would need to be careful with the way in which you set up the regulations linking those two markets through a fund-to-funds provider.
Senator Massicotte: Sophisticated investors have certain amounts of money and are likely to be smart enough to know what they want to do. More important, perhaps they are smart enough to realize that they should not mind losing their money.
You noted that the most serious risk to hedge fund managers is the operating risk and not the market risk. Are you suggesting that the regulators be more involved than they are now, even for the sophisticated investor market? Are you suggesting that we encourage regulation for that sector of the marketplace, or that we continue to presume that these are sophisticated investors who know how to negotiate, select and lose money, and, therefore, we should not be involved?
Mr. Mock: I would say that, in our own backyard, we have two examples of fund-to-funds — Portus Alternative Asset Management Inc. and Nortia Capital Partners Inc. — where operational risk and alleged fraudulent activity took place. This issue is a big one in this world and is not exclusive to hedge funds. It happened with Bre-X, Enron and many others. Where hubris, human greed and money are involved, these potentials exist. That is simply the reality of human nature. I hasten to add that a sophisticated investor in any of these circumstances might still have invested. Perhaps some sophisticated investors were involved in two of the cases mentioned above. I do not know that regulation would prevent this kind of operational or fraudulent failure. Regulation might create an environment of compliance only because it did not prevent incidents such as happened with Enron or Bre-X. Regulation is not a preventive measure and where it is touted as such, it is only preventive to the extent that it creates an environment of compliance. In that way, people have the sense that there is a standard and that the environment of investing is not akin to a Wild West show. I am not sure that regulation of these kinds of groups would prevent anything.
Certainly, I am not sure about the Ontario Securities Commission but in the case of the U.S. Securities Exchange Commission, whether someone is registered or regulated, these commissions still have the capacity to go in, under anti- fraud guidelines, to deal with such issues when they happen. It is not as if the regulations do not exist to deal with these kinds of things, because regulations are in place. The question is whether there needs to be more regulation in pursuit of full disclosure. That is the true tension of the issue.
Senator Massicotte: That point is important. I will repeat it to ensure that we understand your views. You are saying that you like the structure of full disclosure for retail investors and the caveat emptor approach to sophisticated investors. Leave them alone and they will manage their investments, because it provides all kinds of benefits to the marketplace such as liquidity, arbitrage and efficiency and so on. You still maintain that. That is important because you say there are operating risks that can bear serious issues but there is no reason for the regulators or the government to become involved and manage that risk. It is for investors to learn, as you said earlier. Is that a good summary of your opinion?
Mr. Mock: Yes.
Senator Massicotte: The dividing line in the United States is $2.5 million and in Canada is $150,000. Are you happy with that dividing line to designate sophisticated investors? Is the amount high enough? There is a significant difference between the figure in the United States and the figure in Canada. Is that sufficient criteria to say caveat emptor or non caveat emptor.
Mr. Mock: Unfortunately, I must give a non-answer to that. It is difficult for me to say that someone who can put $150,000 into a fund investment necessarily knows more, is more experienced, and is better able to conduct due diligence and see the signals and signs.
The dividing line is difficult to define by a dollar amount. The situation is almost an experience-based one, which I believe is why the FSA has opened up a centre for hedge fund education as one of its interim steps toward bringing the understanding of these things a little closer to everyone.
I would come back to your points about the ability to lose as more of an issue. I do not think a dollar figure defines education level or worthiness to understand what these things are about. The dollar figure simply speaks to the issue of the impact on an individual that has that sort of money to invest versus someone who has put $5,000 of an RRSP or bank account into one of these vehicles. To me, it comes down to an experience issue, a knowledge issue, more than a dollar figure.
I understand practically that we need a dividing line but I could not comment on whether it is $150,000, $250,000 or $300,000, and why one is better than the other.
Senator Massicotte: Everybody would agree that money is not the defining characteristic for knowledge. We have some senators here who are well-to-do but not knowledgeable.
How would you define the dividing line then? I appreciate it is knowledge but no matter how good the words are, that definition leads to such discretion that it will obviously lead to abuse.
Mr. Mock: Herein lies the most critical point of all. We feel a need currently to regulate this area to prevent things from happening to ensure a general level of compliance through the system. However, both the U.S. Securities and Exchange Commission and the FSA in London have said they need more time to nail this down: They need more time to think this regulation through because they are now talking about this bridge between full disclosure and public markets versus the private markets.
Once again, I think the mistake was trying to take hedge funds — a private market process — and pull it into the full disclosure world. I think that mistake is what caused issues in the U.S. more than anything.
Senator Massicotte: As you know, the governor of the U.S. central bank has said, do not touch it. You seem to agree with that.
Mr. Mock: Governor Ben Bernanke said regulation should have a light touch, as opposed to no touch. I would come out on that side.
The Chairman: As we discovered in New York when we talked to the senior officials, they were split at the U.S. Federal Reserve as to whether they should have a light touch or no touch after the Goldstein case.
Senator Moore: I want to put a couple of things on record for the benefit of people who may be watching this hearing and for some of us around the table.
What did you mean by a structured market product?
Mr. Mock: I will give a specific example that hopefully will be illustrative. Banks today will often take 1,000 mortgages that they have on their books, put them in a big pool, take all the cash flow that comes from those mortgages and then sell them into the marketplace.
Senator Moore: They establish a value based on the cash flows. Is that correct?
Mr. Mock: Yes, and then they go to the marketplace and say, as an example, one dollar comes off all these mortgages — and we will divide that dollar up into different structures. We will take the first 20 cents that comes off all these big pools of mortgages and give it to you with great certainty. Then, other people will take the next 20 cents out of the dollar, the next 20 cents and so on.
There is a hierarchy of who receives their 20 cents first. People who want great certainty of receiving their money —
Senator Moore: Who are these people, investors?
Mr. Mock: This is the million dollar question. It is thought that hedge funds are always the buyers of these pools of different stratifications of the 20 cents — they are called structured products. Clearly, if you buy the last 20 cents at the bottom of pool, you will be the last one in line. You may not be paid because if people start to default on their mortgages in this big pool, the money might not come through.
It is basically a lineup of who is paid. If you are at the back of the line, you could be the last one to be paid, or not paid at all.
Who invests in those products: insurance companies, pension plans, all sorts of people and, yes, there is a subset in there of hedge funds. You must look and say, they will bring pools of mortgages to the marketplace; they will bring pools of —
Senator Moore: Would a bank call your office and say we have a portfolio of mortgage funds here. Are you interested?
Mr. Mock: Are you interested in buying a piece of that return from them? Yes, the bank could phone someone like us. They can phone up their clients — their insurance clients and their hedge fund clients. They sell off mortgage pools, credit card pools, loan pools and leveraged loan pools — all kinds of pooling is going on out there. This is the world of structured products.
These products allow banks to originate mortgages through the branch system, put them on their balance sheet and then basically sell them to an institutional marketplace and keep certain returns for themselves without having to maintain these mortgages.
Mr. Petroff: The genesis of that was the Bank of International Settlements, where they put on capital requirements. They said if you can reuse your capital and recycle it, you can obtain a higher return. Now you have Basel I and Basel II accords on a risk-based basis. For the banking industry globally, the securitization basically started with the Bank of International Settlement allowing them to have 8 per cent capital against their assets — whether it is government or commercial — and that created the whole securitization field. This is only 15 years in the making and people are becoming more and more sophisticated with it.
Senator Moore: They are creating more and more structured products.
Mr. Petroff: Instead of raising deposits, they are obtaining capital from all the other players in the market.
Senator Moore: In your remarks, you said, ``We believe . . . accredited investor exemptions'' — and you are an accredited investor — ``are a critical aspect of capital market dealings and securities regulations for us to maintain.''
In response to Senator Massicotte's question, is this point what you were getting at? We view things in terms of protection of consumers and the Canadian public; but you think that the people who are ultimately dealing in these structures are regulated banks and insurance companies, and therefore you do not have to be?
Mr. Petroff: I will make the point that we think the private markets are good. Hedge funds, we think, are a rich area for us to invest in. Anytime you start regulating hedge funds, it hurts our ability to invest in these products. We do not want to lose our capacity. We do not want to reduce our exposure at the expense of retail investors coming into this market. By keeping the private market and the exemptions, we can still deal in these markets, which we like.
Mr. Mock: Another way to answer is, at some point you do not regulate private equity funds, you do not regulate infrastructure funds and you do not regulate all kinds of private market activities that are out there. Hedge funds are part of that private market activity and these discussions revolve around whether part of the private market should be regulated or not in a public disclosed forum.
Senator Moore: I found it interesting that you said hedge funds are ``opportunistic pools of capital.''
Mr. Petroff: That is what they are. We keep trying to define them for our board and the market keeps moving.
Senator Moore: For the record, what are FSA and SEC?
Mr. Mock: My apologies: The SEC is the U.S. Securities and Exchange Commission, which is the national regulator in the United States. The FSA is the Financial Services Authority. It is the equivalent of the SEC in the United Kingdom, in Britain.
Senator Moore: You mentioned that the FSA in the United Kingdom has opened a hedge fund education centre.
Mr. Mock: Yes.
Senator Moore: Do you see that centre as something advisable for us to have in Canada?
Mr. Mock: Yes, it would be a worthwhile undertaking. To the extent that there is some de minimis access allowed from retail to this private market, I think it would be a worthwhile undertaking. I think it is makes a lot of sense.
Senator Moore: People probably do not know what a hedge fund is, and even in your world it moves every day. Maybe this type of a centre would provide some level of comfort or guidance to investors of all types, of all levels. A retail investor may take instructions and say, I did not realize that, I will back off that type of investing, or larger investors might think they would be interested in pursuing that. It would be useful, I think.
Mr. Mock: We could also take the current structure of things such as the Canadian Securities Institute and expand it to allow that. These vehicles have caught the attention of institutions for a long time. They are in the newspaper and are catching the attention of retail investors. It is interesting that retail investors seem to be much less interested in private equity pools, but hedge funds are definitely there, front and centre.
I suggest you do not drive a car before you obtain your licence, and the level of sophistication with hedge funds is such that I think you need that thought process squarely in mind as well.
Senator Goldstein: Do you lend shares to hedge funds?
Mr. Petroff: We used to have a financial institution lend our shares. Who borrows those shares? We do not see through that.
Senator Goldstein: The subsidiary question would be, do you exercise any measure of control over how those borrowed shared shares are voted?
Mr. Petroff: Yes, we bring back those shares before any vote. We do not allow those shares to be voted by anyone but Ontario teachers.
Senator Massicotte: I presume you are allowing the shares to be used by someone selling the unit or stocks short. Do you repatriate those units to allow you to vote, or is it part of the agreement that they use the certificate for selling short but you still have the vote?
Mr. Petroff: We call the shares back to vote them.
The Chairman: Mr. Sprott suggested that there be a selected list of auditors who are sophisticated and experienced in this field so that people can then rely on the fact that some auditing has been done by talented, expert auditors. Do you agree with that idea of a selected list of auditors that are called upon to audit these hedge funds, or leveraged funds? It is an idea.
Senator Angus: He did not say there should be a list. He said that they should ensure that the people who are auditing are specialists.
The Chairman: He said a list, but I am only asking for a short answer. Do you agree that the idea is good? That is obviously something you do not need: You are the sophisticated people.
Mr. Petroff: Are you talking about auditing the operational risk to ensure the valuations?
The Chairman: I am talking about all those things.
Mr. Petroff: On the retail sides?
The Chairman: We are talking about across the board. He did not differentiate.
Mr. Mock: I need to be careful. I cannot comment. I would have to reflect on that.
The Chairman: The way that the banks solved their problems in the 1930s was the Basel settlement process, which ensured that a certain amount of capital was in place to cover off risks. We heard from Mr. Sprott that the amount of exposure is great, and we have heard in the United States of the idea of establishing a similar clearing house for credit settlement for hedge funds, leverage funds. Have you thought about that? Do you think a clearing house is a good idea?
Mr. Mock: A clearing house? Are you talking about derivatives or hedge funds?
The Chairman: I am talking about both: derivatives first, hedge funds as well, but deal with derivatives first.
Mr. Petroff: Derivatives are becoming a more standardized product but they are not traded on an exchange and, as a result, the tradition has been to have agreements between us and another financial institution. We use derivatives potentially to hedge and recycling these risks creates a huge amount of notional exposure, which means it is not dollars, it is the notional exposure. If we make a $100-million interest rate swap to protect from rates going up, another bank may be long and wants to protect from rates going down, so it transfers risk and is carried out over the counter.
I am not sure it is standardized globally, but we would need to create standardization, which is what the futures market does. It is a standardized product where there is a clearing corporation.
Mr. Mock: I still believe that the bank regulatory system currently in place probably would be the most appropriate way to oversee some of this market.
The Chairman: Obviously, there is much more and every senator's appetite has been whetted. We are curious to proceed, but we have other witnesses from other funds to come after you. Thank you for your evidence. We are still a work in progress on this. We have not come to any conclusions. We are still trying to sort out the contours and risks.
It seems to me that there is a certain unfairness in your position. I do not quarrel with it, though. As sophisticated funds for a certain union, you are able to use your expertise to be the sophisticated safeguard of investors. A whole raft of people are not in the same beneficial position of receiving supervised pension funds and therefore do not have access to high rates of return. Is there a fundamental problem in our financial system that has not provided a rate of return available to people between a 10-per-cent rate of return and a 2 per cent rate of return, which they receive for certificates of deposit, CDs? Have we failed the ordinary retail investor here?
Mr. Mock: Not at all.
The Chairman: That argument was made by people in the income trust situation that is confronting us now.
Mr. Mock: I will ask a simple question. How many retail investors go out on any given day and invest in all sorts of complex swaps?
The Chairman: Very few.
Mr. Mock: That is the point.
Tons and tons of things are going on around the planet today that are not necessarily accessible, nor should be accessible. Formula one car racing might be accessible, or you might argue that because a formula one racing car exists does not mean that everybody should be allowed to drive one.
The Chairman: Witnesses, thank you very much. Again, we have a high degree of respect for your institution. It is a stabilizing force, particularly in my province.
We are ready to continue our hearings on hedge funds. We want to welcome this set of witnesses. We are continuing the study by the Standing Senate Committee on Banking, Trade and Commerce on hedge funds.
Our committee was in New York last October, and we discussed a number of issues within our mandate. During our discussion with regulators and representatives of the financial sector, hedge funds emerged as a key issue, and the sector was valued some months ago at approximately $1.2 trillion. Now, our estimates are in excess of $1.7 trillion. It has almost doubled in less than a year, globally. In Canada, it was estimated in 2004 at $26 billion, and anecdotal evidence indicates that it is much higher now.
We heard about hedge funds during our recent study on consumer issues. At that point we recommended the appointment of an eminent person to review appropriate regulatory oversight.
Nevertheless, the key question for this committee is how and if these types of financial products should be regulated or supervised to protect the consumers. As well, one of our fundamental concerns is the systemic stability of the global and financial markets.
I welcome today witnesses from the Caisse de dépôt et placement du Québec, Mr. Malo, Executive Vice-President, Hedge Funds, Mr. Bergeron, Senior Vice-President of Legal Affairs, and Mr. Galarneau, Senior Analyst, Hedge Funds. Please proceed in the language of your choice.
[Translation]
Mr. Claude Bergeron, Senior Vice-President, Legal Affairs, Caisse de dépôt et placement du Québec: Mr. Chairman, we would like to thank you personally and on behalf of the caisse for giving us an opportunity to discuss with you this category of investment products whose virtues are becoming known to people.
Our presentation today is broken down into four parts: a brief introduction to the caisse; demystification and composition of the investment universe of hedge funds; the way in which the caisse deals with these investment vehicles, how we invest, what precautions we take, and finally, an overview of industry trends and the main issues in our view. This is probably what you are most interested in.
We are now on page 6 of the presentation. The Caisse de dépôt et placement du Québec was established by a special law in July 1965 by the National Assembly of Quebec. Initially, its mandate was to manage the assets of the Quebec Pension Plan. Today, it manages many pension and insurance plans in the Quebec public sector.
The mission of the caisse is to receive moneys on deposit as provided by law and manage it with a view to achieving optimal return on capital within the framework of the depositors' investment polices while at the same time contributing to Quebec's economic development.
You can see from the slide on the structure of the caisse the importance we attach to hedge funds. On the left side, you see the main investment vehicles, real estate, private equity, the equity markets, fixed income and hedge funds, which come under the chief investment officer. On the right side of the chart, we show the various support groups for the investment groups. I would draw your attention to the fact that hedge funds by themselves make up an investment category within the universe of investment vehicles available on the market.
The total assets of the caisse, and these figures are for December 31, 2005, because our annual report has not yet been tabled in the National Assembly, are $224 billion. I estimated that the amount will be slightly higher in the near future.
I will now turn the floor over to Jean-Claude Galarneau to talk about the various categories of hedge funds.
Jean-Claude Galarneau, Senior Analyst, Hedge Funds, Caisse de dépôt et placement du Québec: Mr. Chairman, my task today is to explain or to try to demystify the various strategies within the hedge fund universe. It is very difficult to categorize each strategy available on the market. We are talking about some 9,000 hedge funds on the market, all of which are slightly different. Generally speaking, however, we can talk about certain types of strategy. There are three columns. The first one is called ``relative value,'' which is commonly known as ``arbitrage.'' We tried to give you the profile of strategies that tend to be less risky rather than more directional strategies. There is fixed-income arbitrage, convertible arbitrage, market neutral equity, and also statistical arbitrage, which is a principle in which we use systematic models to predict stock prices.
The second category, which is more risky than the first, is event-driven. When a significant or permanent event occurs within a company, such as a merger/acquisition or a restructuring, some managers will try to profit from the opportunities created by the event. There is also the category of distressed securities. The third one, with which you are familiar — and that is easy to assess because it includes the most common strategy in this universe is the long/short equity. We realized after doing a quick study of the data base that this accounted for some 30 per cent of the universe of all hedge fund strategies. It includes those that take macro positions, systematic models that give a market view of forward contracts, and also investment in emerging markets.
These strategies are quite heterogeneous. Within our team, we have used a specialized approach rather than a generalized approach in order to analyze the various strategies to better identify the challenges of each and to properly understand their environment.
On pages 14, 15 and 16 we describe briefly some of the strategies that are quite well known on the market and about which you have doubtless already heard.
In section 3, we talk about our team. There are 18 of us. We are broken down into three groups: the first one works on building the portfolio, that is the way we allocate amounts through various strategies and managers; a second team works on operations, that is an operational review of managers and legal review; and finally, my team, the team that works on selecting managers.
As I was saying, there are some 9,000 hedge funds in the world, and our job is to try to demystify them in order to make better investments. Our mission is therefore to invest in the best hedge funds throughout the world and to ensure that they comply with our investment criteria.
How do we go about doing that? There are three steps: first, pre-selection; second, due diligence, and if a manager is part of our portfolio, he will be part of the third step, which is to follow up on our managers. For pre-selection, over the years we have established a vast network of contacts that enable us to assess, know and get in touch with the best portfolio managers in the world. Our activity can be seen as that of a specialized human resources firm that is trying to hire talented people. When we award a management contract, it is the equivalent of hiring someone to work for us. It is as though this person occupied an office in virtual terms. The person has three funds and is responsible for profits and losses. The funds become the expression of the person's talent.
This due diligence of people, the organization, the infrastructure, the investment base, and the strategy being used — mainly whether it is unique, profitable and competitive — and mechanisms to manage risk, are there in order to limit losses. We have also done a quantitative study of the performance record to better assess the talent of the managers we have hired. Finally, there is due operational diligence, which is done by a team. Three people travel around the world to meet with managers, go where they are and see how operations are conducted by each of these managers with whom we have invested.
What you see on the screen is part of our monthly process. For our part, we get letters periodically, sometimes monthly or quarterly. We talk to each of the managers at least once a quarter, and we go to visit them once a year, and once a month, we review the portfolio. The information you have on the screen shows the key points that would mean that a fund could be placed on our watch list and allow us to take action and say what we would do with our investment.
Michel Malo, Executive Vice-President, Hedge Funds, Caisse de dépôt et placement du Québec: With respect to the composition of our portfolio, on page 21, it should be understood that we know this is an area that can be very volatile. Price variations can be significant. In our approach, we developed a portfolio whose characteristics are designed to produce a higher return, but also to ensure that the risk is much less variable. We expect our portfolio to vary less than what you would find in a standard hedge fund portfolio elsewhere. Our long-term expectations for hedge funds are for an expected return of 6 per cent with a volatility of 10 per cent. Why? Because we think that the returns in future years will be much lower than in past years for a whole series of reasons. We have a much higher concentration in hedge funds. I would say that historically the volatility rate should be between 5 and 6 per cent. In our case, we have almost doubled the anticipated risk in this category of assets to reflect the realities you are discussing today: namely, the lack of regulation, the risk attributable to the manager, the danger of fraud and the lack of transparency.
We know that in this category of asset, these are the types of risks we have to deal with. We should not forget that in the financial markets, people are compensated for taking these risks. Without risks, there is no return. It is important to understand that basic point. We try to build it into our forecasts.
Why do we include hedge funds in a portfolio such as ours? That is rather technical. On page 23, what we see in the asset composition we have is that the expected return would be approximately 6.9 per cent; if only 5 per cent of the caisse's assets are invested in hedge funds, in a diversified portfolio, we get the same rate of return, but the risk drops by about 30 base points or one-third of 1 per cent.
And there is no doubt that if we allowed this, the allocation could be much higher. This is based on mathematical hypotheses. In these, it is assumed that this could also be done beforehand. This gives a portfolio like ours very good diversification.
On page 25, we talk about industry trends and activism. We do not necessarily see this as problematical, but we have to be accountable about this to our boards of directors and to a number of our clients. This week I found out that this is called the ``C1 Risk,'' which means that when a manager is in column C of the Wall Street Journal, that is not a good thing. We see a great deal of activism in the industry, managers who play an active role to try to reflect value in the industry. I think this has always existed. There are good and bad ways of doing that. In our case, we try to work with managers who have an approach that encourages cooperation with the directors in place. That has produced good results for us in the end.
The negative publicity about hedge funds is often associated with this type of company. As you have seen, the term ``hedge fund'' is very broad. It means many things and almost nothing. Activism, which has often been in the headlines recently, is only a small part of that, and an institution can choose to be involved in that or not.
Another important factor is transparency. As Neil Petroff, from the Ontario Teachers' Pension Plan, was saying this morning, this is a zero-sum gain, which means that the return is made at someone else's expense. Of course, this results in a lack of transparency for the industry. We do not want to open up our books and be required to reveal our positions.
If this were just a strategy dependant on the stock market, the beta of the portfolio, everyone could be involved. In an industry of this type, there is additional value in keeping our position almost secret or even to say nothing at all. However, in these cases, there is an additional challenge. That is why we try to establish processes to investigate and better understand what is going on.
There are two ways of overcoming the lack of transparency: segregated accounts or third parties. There is always a way of reaching an agreement. In segregated accounts, it is as though the manager were opening an account in the client's name, where everything put into the portfolio can be seen, and the risk can be assessed. The other possibility is to sub-contract another organization which will have an agreement whereby the contents of the portfolio are not revealed to the clients, but the client is given the necessary risk indicators in order to assess the various risks involved. Often, a combination of these two approaches is used.
The last thing we would want is a segregated account where everything is visible, but without the infrastructure required to assess the risk. If a manager sends me a file with 1,500 positions and I am unable to do anything with that, there is no benefit to me. It is sometimes a good idea to have third parties or independent people involved.
Sometimes, transparency itself, and I am on page 27, requires a very significant infrastructure that not everyone has. Mr. Mock from the Ontario Teachers' Pension Plan was saying earlier that there are investments in music royalties, investment in parts of the world where even the time difference can present problems. It is often a combination of seeing through the manager and having other people to give us some risk measurements.
On the next page, we talk about liquidity. We often hear about liquidity, but in the case of a hedge fund, this applies for a long time. That is true. Sometimes, people have a variety of mechanisms that mean we cannot take our money out, and even if we wanted to do so, they have the right to prevent us from doing that. A number of recent studies say that comparatively, there may be money to be made in long-term investments rather than shorter-term investments. The markets will remain volatile and often human beings react negatively to volatility. It is the principle of selling low or buying high. So often liquidity constraints will allow us and force us to keep the investment longer, to do more homework, in order to ensure that we are prepared to make a commitment for the entire period.
Why do hedge funds exist? To give a little background, in the beginning, in the 1920s, 30s and 40s, managers were only trying to protect the capital, in other words they were trying to ensure that a dollar kept its value. Why? If we invest a dollar and we lose 50 per cent, it takes a 100 per cent return to recover that. Making a return of 100 per cent is much more difficult. The beauty of the hedge fund approach lies in the management of the downside. In other words, the investor decides if he or she prefers to lose less rather than to lose more, knowing that later, the situation will improve. A great deal of time and effort has been devoted to measuring and understanding risk. That is why people are attracted to hedge funds. And the portfolio management market, which is very competitive, and formerly involved just the purchase of securities, is starting to see a combination of these various strategies, the long only, with the hedge fund industry. We think this is better for the industry generally.
To complete our presentation, I would like to move to page 32, which talks about the main challenges. These are the situations facing hedge fund managers.
[English]
The Chairman: Thank you very much. I want to be fair. Each senator will have five minutes for questions. I hope that the witnesses will respond sharply and briefly. We have a lot of knowledge about this subject, and we want to add to our own base of information.
Senator Moore: Thank you, witnesses, for being here.
Yesterday we heard from Eric Sprott of Toronto, and you saw the witnesses that were here earlier today. We talked about oversight with regard to the hedge fund industry. Mr. Sprott thought there should be some oversight or regulation and a select list of auditors. Do you have any comments on those two ideas?
Mr. Mock, who was here earlier, thought there should be ``a light touch'' of oversight. What are your thoughts with regard to oversight? Should there be some oversight? Mr. Petroff said: ``We believe that exempt or accredited investor exemptions are a critical aspect of capital market dealings and securities regulations for us to maintain.''
[Translation]
Mr. Bergeron: As we mentioned earlier, as institutional investors, we have established quite a structured process for reviewing and deciding which risks we will assume in the choices we made.
Of course, identifying the inspecting auditor responsible for doing this within the company is part of the due diligence process. So if we are not satisfied with the individual who is auditing the books, this would probably be the best reason not to invest in a particular company.
[English]
Senator Moore: Who audits the books of the companies in which you may invest. That is part of your due diligence.
[Translation]
Mr. Bergeron: Exactly. My answer is incomplete with respect to your current mandate, in that it deals with work being done by institutional investors. My answer would be different for retail. In all of the steps we have mentioned, which we follow in our investments, when a hedge fund manager wants to attack this market, we are of the view that he should be subject to the same constraints and concern; he should feel some pressure from retail representatives, similar to the pressure he feels from institutional investors.
How could that happen? Regulatory agencies could, in the case of hedge funds, do the type of work that we do, in other words once an individual makes a choice, there is management follow-up, and a follow-up of financial results. For instance, was there disbursement on the part of some investors? Did key staff members leave the organization? Is there too much concentration in the hedge fund? Is there room for risk management in the hedge fund? That would be regular follow up.
If an organization wants to enter the retail market, we are of the view that the required protection should be granted. In our case, we have set up safety barriers to obtain this protection.
[English]
Senator Eyton: As far as I know, the committee has not seen an analysis like this one, particularly the selection of the managers. I am intrigued by the way in which you approach it. My question around that approach is about the effectiveness of your selection process. I assume you learned a lot over the years and you are becoming, as you said, close to perfect. You have described the different kinds of categories in which managers fit in style, but how many do you have now, and what is the turnover?
Mr. Galarneau: We currently have about 90 managers in our portfolio. In the last two years, we have been active in turning the portfolio, even though we are a patient investor, I would say. We are there for the long term. We want to establish a partnership with our fund managers. We are a partner with our fund managers. About 25 per cent would be the correct figure regarding the turnover in the last two years.
Senator Eyton: That is about 10 per cent or 12 per cent a year?
Mr. Galarneau: Per year, yes. About half the portfolio has turned over in the last two years.
Senator Eyton: About half?
Mr. Galarneau: Yes: Then again, we have also increased our allocation to the hedge fund universe. We have ramped up this activity and, as more money came in, we added some funds and at the same time redeemed some. The figures are probably right.
Mr. Malo: On that issue, part of the turnover is due to me. We are reducing our number of managers so we can better concentrate our asset size. We tend to believe that an individual can follow only so many funds correctly. In an industry where there is not much transparency, we have an interest in having a better relationship with managers themselves. In that fashion, we are trying to reduce the number of funds. The turnover has been a bit higher because of that approach also.
Senator Eyton: I appreciate the care you are taking. I love the process. One factor in selection is behaviour. You talked about the risk profile in terms of leverage, and I guess other risks as well. Geography is probably another factor, depending on if you are Canadian or live elsewhere.
Once selected, is the behaviour consistent? I guess consistency of behaviour is something you track. If it does not accord, then they are gone, I suppose. Is that one reason you are turned over?
Mr. Galarneau: That is correct.
Senator Eyton: I wonder about managers. I think the committee is more concerned about what we call riskier hedge funds, perhaps more highly leveraged hedge funds. I want to juxtapose that concern with a fairly common practice in hedge funds where there is a management fee of some sort paid, and then there is a significant percentage of performance fee over some hurdle. I know the fees vary, but let us say it is four per cent and 20 per cent over some of these hurdles.
If I select someone based on behaviour and past history, and that person sees an exceptional opportunity, if I am a manager, in good markets where things are rolling along nicely, it seems to me my behaviour might alter a bit. I receive 20 per cent of the upside and essentially I do not pay any of the downside. As a manager, I may shave it a little. The manager may not shave it dramatically but there seems to be an inherent conflict in there — something I guess you watch from time to time. Is there not a tendency for managers to push the envelope in a good market, especially to obtain some piece of that extra performance fee?
Mr. Galarneau: You refer to the free call that you give to a fund manager. If the manager performs well, then the manager will receive a 20 per cent incentive fee. Otherwise, there is no paycheque.
One thing we look at carefully is the alignment of interests. By that we mean, how much of your own money do you have invested alongside us? This information is part of our due diligence, and ensuring that what you described, namely trying to hit for the fence, does not happen, or, if its does, it will hurt. If the manager falls, it will hurt, but at least the manager will hurt too. We will be hurt also, but to give a free call to a fund manager where the fund manager does not have personal wealth invested in the fund could be a dangerous thing to do.
The Chairman: Our five minutes are up.
[Translation]
Senator Goldstein: It is reassuring to hear that my retirement funds are being well managed. I have one question: do you lend shares to hedge funds? And if so, do you, on the one hand, control the vote attached to those shares, and on the other hand, can you call back those loans at any point?
Mr. Bergeron: I will start by answering your last question. First off, all security loans are dealt with internally, which is unlike the way other investors operate, where these activities are dealt with by trustees.
That is generally the case when people do not have the technical expertise nor the staff to do the work. At the Caisse de dépôt et placement du Québec, we have a dedicated team managing security lending. The agreements in place allow us to repatriate securities in all cases. In all cases where we anticipate certain issues to come up in a vote at the shareholders' meeting, we would repatriate the securities.
Finally, I will answer your first question as to whether we give loans to hedge funds. The answer is no. Why? Because under the agreements we have established for which we draw up a rigorous risk profile, we lend to counterparties that have high credit ratings. Security lending is similar to money lending; there is value or credit attached to it, whereas generally that is not the case for hedge funds. These are not counterparties that we deal with.
Senator Massicotte: Thank you for being here today. We are discussing a rather complex matter and you are experts in your field. I did note however that according to your presentation, you invest with hedge fund managers, but internally you do not operate hedge fund investment strategies. Is that correct?
Mr. Malo: I am responsible both for external hedge funds and the internal ones we manage.
Senator Massicotte: I noticed that the nine strategies are pursued internally.
Mr. Malo: Perhaps not all nine, but several of them are replicated at the caisse, not necessarily under my direction, but in other groups as well.
Senator Massicotte: Our committee's main purpose is to examine whether regulations are adequate for hedge funds and whether or not we should recommend something new.
On the one hand, there are retail investors who need a great deal of information; the regulations are very clear. On the other hand, there are sophisticated investors who meet the $150,000 criterion. These people are considered to be experts, they protect themselves and we should not be imposing more burdensome regulations that would hamper their effectiveness. Do you agree with this principle?
Mr. Bergeron: Yes. In our case, there is a process in place. In the case of an investment, there is the issue of supply and demand. If you want to invest in a fund that has performed very well, which many other investors want to invest in, that is when the negotiation game takes place. Historically speaking, hedge funds were favoured in this game because the best performers had such a high supply of capital that perhaps the power to negotiate decreased. However, certain ``market'' events changed this perception.
I would say that today investors have an increasing number of options. They tend to want to exert more control over their investments and their demands are greater, so there is an increased power to negotiate. To answer your question I believe institutional investors can take care of themselves.
Senator Massicotte: You do not believe we need new regulations or an additional structure to protect, safeguard or educate institutional or sophisticated investors?
Mr. Bergeron: We do not believe so.
Senator Massicotte: When it comes to retail investors, are you satisfied with the existing procedure? I know it is not your area of expertise, but the information is available today, the regulations are available. Is this adequate to meet the needs of retail investors?
Mr. Malo: Once again, I should point out that we do not consider ourselves to be experts in that field. Honestly, I cannot answer. I am not enough of an expert in that field.
Senator Massicotte: The criterion we have in Canada is $150,000 whereas in the United States it is $2.5 million. Is this a fair way of distinguishing between sophisticated and not-so-sophisticated investors?
Mr. Malo: I do not know. If you compare someone who wins $150,000 playing the lottery with someone who obtained that amount by playing the stock market, I could not tell you whether that is how we should define a person's degree of sophistication. I do not think one person is less worthy than another. Has there been a change in the $150,000 amount over the last few years? It may be a matter of perception. If the amount was set 20 years ago and if over this period, the average assets of individuals increased, that may be the issue. Are we looking at total assets? Many people today could have $150,000. There are different ways of looking at it.
Senator Massicotte: Just to clarify things, are hedge funds good for the Canadian economy and for investors? Is this something positive or, in five years time, will we look back on them and wonder why we ever allowed them?
Mr. Malo: I think it is good for the global financial system. It provides additional stability and has brought in many more investors. However, there are some people who are so sophisticated that they are prepared to assume part of the risks banking institutions would not take on because they are responsible for people's savings. Others are prepared to take on these risks and perhaps their investments will evolve over the next 10 years.
The term ``hedge fund'' is misused because it seems to refer to an element of volatility. Volatility is inherent to financial markets and in general it is a bonus for everyday investors.
Senator Massicotte: Do you believe that it is therefore totally acceptable and positive? It is complex, we say that a lot, and perhaps we are concerned because we do not fully understand the issue.
Mr. Malo: I can only speak for my employer, which is a sophisticated institution. I cannot speak for others. We believe the regulations are sufficient for institutions.
Senator Goldstein: Your mission is enshrined in legislation and a significant part of it concerns Quebec's development. To what extent does this criterion have an effect on the nature of your investments?
Mr. Bergeron: You should look at section 4 of our presentation. First of all, the caisse receives funds from retirement or insurance funds, and it must invest these funds to maximize the return on investment, that is its first duty, while contributing to Quebec's economic performance.
Senator Goldstein: Do this mean that the need to maximize your return on the investment trumps the economic development criterion for Quebec?
Mr. Bergeron: Yes, without hesitation. We must provide our depositors with the best possible returns through existing investment instruments. That is our priority. It is part of the caisse's mission and it is the duty of employees to work toward that end.
Senator Goldstein: So the issue of Quebec is secondary to you when you make investment decisions.
Mr. Bergeron: The simple fact that the caisse obtains good returns, significant sums of money, and that people can draw Quebec pensions — now and in the future — and that they can receive significant amounts, that is the first thing.
Second, if we can by choosing certain types of investments — for instance mortgage products — invest in Quebec mortgage products, this would have an impact on Quebec.
[English]
The Chairman: I have some brief questions.
First, on page 30 of your statement there is a reference to a study conducted by the Bank of New York and Casey, Quirk and Associates. Would you make that study available to the committee? We are interested in factual studies. It would be helpful.
Second, do I understand your documents correctly to say that 5 per cent of your funds is invested in the sort of generic term of hedge funds? Is it 5 per cent? In dollar terms, what would that be, Mr. Malo?
Mr. Malo: It is 5 per cent of $142 billion, roughly.
The Chairman: That is about $7 billion?
Mr. Malo: Correct: That is externally. I think Senator Massicotte said earlier that we also manage similar strategies internally, so that amount is outside.
The Chairman: That is your external exposure.
Mr. Malo: Correct.
The Chairman: Finally, there is an interesting graph on page 23. I want to ensure we understand it. It deals with the Prospective Risk/Return Profile — Impact of the Addition of Hedge Funds. I want to know that we are reading this correctly. It shows that for the caisse with 5 per cent hedge funds, the rate of return is 6.9 per cent.
Mr. Malo: Correct.
The Chairman: The caisse without hedge funds rate of return is 6.9 per cent. It is similar. However, the caisse with the hedge funds has a risk profile of 8.7 per cent and the risk profile without the hedge funds is 9 per cent, so essentially risk is reduced by 0.3 per cent with hedge funds. Hedge funds therefore provide stability. Do I understand that?
Mr. Malo: For 5 per cent, you are reading that exactly, yes.
The Chairman: The key for us is to understand, from experienced investors such as yourselves, what we should do, if anything, with respect to regulating hedge funds.
We heard earlier today from the Ontario Teachers' Pension Plan that we should leave them alone because regulation might interfere with their processes. They said they are in the private equity market, the private fund market, they can take care of the risks and that the existing framework is pretty well okay.
In a nutshell, what is your position? I am sure you have debated this question. If you are free to tell us, we would be interested.
Mr. Malo: As we said earlier, we are truly comfortable with the amount and the types of regulations that exist. As long as you ask your questions in terms of institutional type investors, we believe that the regulations in place now are sufficient.
The Chairman: They are minimalist, Mr. Malo. In the United States, hedge funds were comfortable prior to the Goldstein decision. At that time, they had ``regulation light.'' There was a certain overview by the New York Stock Exchange and the securities commission in terms of registration. That was knocked out. The fund managers in the United States told us that they were happy with that ``regulation light'' regime, and they were unhappy that that regime was removed by the courts for the technical reasons with which I am sure you are familiar.
We have practically no regulation, in terms of direct regulation, other than your surveillance, auditors and fraud, and you are telling us that you are comfortable with the situation. Do you want to think about that? If you want to think about it and give us an answer in writing, that is fine. We are interested in your considered view. We do not want to hurt the industry, but we have a mindful responsibility to the economy as a whole and to consumers, whether private consumers or retail consumers.
Senator Massicotte: Mr. Chairman, he said twice, once in French and once in English, that he is comfortable with the existing regime.
The Chairman: I heard and understand that. However, we have a conundrum, and that is to protect the public interest.
If you prefer not to give us the benefit of your view, we will accept that. I am not trying to badger you.
Mr. Malo: I would say only that no amount of rules or regulations will stop certain situations from occurring. We have talked about Tyco and Enron, and in Canada we are still talking about Nortel. There are sufficient regulations in terms of the filing of financial statements and registration.
The Chairman: However, they did not work.
Mr. Malo: Exactly: That is my point.
The Chairman: Nortel was a widely-held company and regulation did not work. The same applies to Enron. We are concerned about whether there are things we can do appropriately, having in mind, market conditions. We understand this as well: We have talked about close to $2 trillion of investment in hedge funds. We have now heard that there are not 8,000 but 9,000 hedge funds. They are growing by leaps and bounds. We have also heard that, in terms of overall regulation, we are in a competitive market because the London market is free of regulation. The only thing they have on the marketplace that we know of so far is education, which we think is a good suggestion.
If you could deliberate and let us know your considered view, in the public interest: you are a public-minded institution and we are trying to protect the public. We will talk next week to the governor of the Bank of Canada, who urged us at one juncture to launch this inquiry. Then, we heard from the governor that we should leave them alone. We heard exactly the same debate at the U.S. Federal Reserve in New York. They were split in opinion.
Give us the benefit of your advice. If you have no advice, that is fine.
We appreciate your presentation today. It was a fascinating exploration in hedge fund practices, and I am sure that many Canadians, particularly from Quebec, have a feeling of greater security as a result of your efforts. Thank you for that. Please help us if you can. If there is anything more you want to tell us, please send it to us in writing, and we will circulate it to the committee. I undertake that we will read it. We are readers.
The committee adjourned.