The TSX index has rallied 17 percent from its YTD lows on January 20th, a rather sharp upward movement in 3 months.  We never make any forecast for the outlook for the market, but it is a good time for investor to consider some form of protection for their portfolios.  Hedge funds can be a useful tool for doing so.

Hedge funds can help investors protect and diversify their portfolios because they are supposed to have a low level of correlation to traditional asset classes. Correlation is a measure of how closely the performance of one investment moves up and down with another investment. The latest quarterly edition of Canadian Hedge Watch reported that the Equally Weighted Avg. of 160 Canadian hedge funds had a three-year correlation of 0.85 with the TSX index. Conversely, the three-year correlation for the Nimble Fund is 0.15 and 0.27 for the Lightwater Long Short Fund.  Why is low correlation desirable? Low correlation between investments can help reduce the overall volatility of a portfolio. If a fund has a correlation of 1.0, it will move 1:1 with the market, so the lower the correlation figure the better, in terms of diversifying portfolios. So when comparing hedge funds, be sure to consider correlation as an important investment factor.
 

TOP PICKS:

Tucows Inc. (TC.TO)

We focus on “uncrowded” Canadian mid-cap stocks that don’t get much attention from investors or sell-side Analysts. Tucows is such an example.  Their two “cash-cow” businesses are (i) website domain registrations and (ii) mobile telecom service re-selling.  They also have a 3rd business providing high speed internet fibre to small-town USA, which will be an engine of growth going forward.  It is a rare Canadian tech company that produces predictable cashflows, trades at a reasonable multiple, and has decent growth prospects.  We also like that mgmt. has consistently used its cashflow to buy back shares and has been self-sufficent with its capital.

Callidus Capital (CBL.TO)

We focus on “uncrowded” Canadian mid-cap stocks that don’t get much attention from investors or sell-side Analysts. Tucows is such an example.  Their two “cash-cow” businesses are (i) website domain registrations and (ii) mobile telecom service re-selling.  They also have a 3rd business providing high speed internet fibre to small-town USA, which will be an engine of growth going forward.  It is a rare Canadian tech company that produces predictable cashflows, trades at a reasonable multiple, and has decent growth prospects.  We also like that mgmt. has consistently used its cashflow to buy back shares and has been self-sufficent with its capital.

Pair Trade: LONG Air Canada (AC.TO)/ SHORT Air Transat (TRZ.TO)

This pair trade is driven by our SHORT conviction in Air Transat.  As Canadians, we admire and appreciate the service that Transat provides.  As investors, we believe Transat takes far too many risks relative to the razor thin margins that it has historically earned.  Currency movements, warm weather, threat of pilot strikes, the Zika mosquito virus – all are examples of risk that led to a dismal Q1 loss.  Q2 will also be ugly, as will the summer season with all players adding too much capacity.  Longer term, we see more headwinds than tailwinds for Transat.  We are not big fans of Air Canada either, but as a hedge fund we use pair trades to reduce industry-specific risks.  In this instance, we plug our noses and buy Air Canada as a ‘long’ position to hedge our risks. 

Past Picks: Apr. 22, 2015

DirectCash Payments (DCI.TO)

Pair Trade: *LONG* Allegiant Travel Company (ALGT.O)/ *SHORT* WestJet (WJA.TO)

NXT Energy Solutions (SFD.TO)

Total Return Average : -11.17%