Epic Capital Management Inc. is shutting down its flagship hedge fund after a slump in returns and a spate of redemption requests by investors.
The Toronto-based firm had seen its assets tumble from $300-million to $200-million as markets crashed and investors fled, and decided that giving remaining investors their money back was the prudent move, said chief executive David Fawcett.
Epic's move also affects the $35-million Arrow Epic Fund, which it runs as an external manager to Toronto-based Arrow Hedge Partners Inc. This smaller fund, which plunged 45 per cent this year as of last Friday, is also being wound down.
“It's not our decision, but if they are going to shut down their two other funds, we have no choice,” Arrow Hedge Partners' chief executive officer James McGovern said. “Otherwise, our investors will be disadvantaged…
“Letters are going to investors, and advisers are being informed right now,” he said Tuesday. “It's disappointing, but it's the right course of action, given they are getting redemptions … We've had some redemptions in our fund.”
Epic focused on mid-sized Canadian companies, trying to find ones that were under-priced, but that strategy couldn't protect the firm from a meltdown in Canadian markets. Epic's main fund had fallen about 38 per cent as of the end of September, according to the firm's Web site, and many investors were asking for their money back.
“We wanted to do it while we could and didn't have a gun to our head,” said Mr. Fawcett, who added he expected a “pretty orderly unwind.”
If investors approve the plan to close the flagship fund, they should get about 80 per cent of the money they are entitled to by early next year, and the remainder as Epic is able to unload tougher-to-sell investments, he said.
With regard to the Arrow Epic Fund, Mr. McGovern said he expects his investors will get back 80 per cent of the capital “probably for the end of November.”
While Mr. McGovern was informed on Monday of Epic's decision, he is not surprised. He has been predicting that the Canadian hedge fund industry would shrink to about $20-billion within a year from about $30-billion because of the brutal stock market meltdown.
Epic, which consisted of three partners and six employees, is letting five of the workers go.
The flagship fund had already sold most of its liquid stocks and had moved 75 per cent of its assets into cash, helping it to meet redemptions, Mr. Fawcett said.
The problem was that a chunk of the remaining capital was in illiquid private-placement investments, which are tough to sell in current markets. That meant that if Epic kept going, investors who stuck it out would have owned too high a proportion of those investments, Mr. Fawcett said.
As a long-short hedge fund, the firm could employ short-selling to protect against losses, but that strategy didn't offset the massive drops in stocks.
“You really thought if you got in a down market you would have shorts that would help you,” Mr. Fawcett said. “It was such an odd, all-pervasive, global situation that it caught us and the world by surprise.”