Learning From a Canadian Hedge Fund-Related IPO

by: Larry MacDonald

Billionaire money manager Stephen Jarislowsky has some views on initial public offerings (IPOs) that might give pause to investors considering the impending IPO of Sprott Asset Management Inc., the rapidly growing manager of Canadian hedge funds and mutual funds. Mr. Jarislowsky says:

My experience is that you can buy nine out of ten new issues at a lower price a year or two later. Companies usually go public when they can get a high price at the outset … because of this I generally avoid new issues … all told, this policy has saved me enormous pain.”

Regarding prospects for Sprott’s new shares, it would be facile to point to the falling shares of other hedge funds (or near equivalents) that have recently gone public (the first, Fortress Investment Group, is down by over half since listing just over a year ago). They are different funds than Sprott, which delivers more alpha and thrives in bear markets because of short selling skills, “calamity” bets on precious metals, and diversification into alternative assets, notably commodities.

Indeed, if the bearish environment persists, the Sprott funds should continue to do well. But if it gives way to a bullish environment, they may not fare all that well, going by the past record. After the downturn of 2001-2002, Sprott’s flagship hedge fund had a drawdown of over 20% in one 12-month period. They did recover nicely after that, it is to be noted.

Still, it might be better to buy Sprott shares after the IPO marketing hype has subsided and on one of the dips in fund performance that lie ahead. The reversals are destined to occur because the Sprott funds are not index-huggers; they take the risks to shoot for stellar results. And with the risks, come occasional missteps. As the prospectus itself says:

"Our funds tend to be more volatile as our investment team strives for exceptional performance and returns rather than attempting to mirror or follow the market indices. This volatility combined with negative or poor performance could combine to lead to a reduction in assets under management and lower management fees and performance fees."