Gloria Nieto/The Globe and Mail
Red Sky Capital Management is closing its two hedge funds, the latest sign of stress for small players in an industry struggling with poor returns and increased competition for investors.
In a letter to unit holders this week, Red Sky founder and chief executive officer Timothy Lazaris said the decision to close the funds was a "very difficult decision to make" that was prompted by the company's inability to "gain sales traction" with investors.
UPDATE: CI Investments Inc. announced in a press release late Friday that Red Sky has resigned as sub-advisor of CI's Red Sky Canadian Equity Fund. Cambridge Global Asset Management has been named as the new portfolio advisor on the fund. One person close to CI said that the company has been disappointed with Red Sky's investment performance. The Red Sky Canadian Equity Fund reported a negative return of 8.92 per cent this year as of Dec. 11. The S&P/TSX composite index was up nearly 2 per cent in the same period.
Red Sky's other hedge fund, Red Sky Partners Fund II, which was launched in 2014, only has $6.1-million of assets.
Mr. Lazaris said in his letter that Red Sky will return capital to unit holders after the funds are liquidated.
Red Sky had more disappointing results as the sub advisor to CI's Red Sky Canadian Equity Fund, which reported a negative return of 8.92 per cent this year as of Dec. 11. The S&P TSX composite index was up nearly 2 per cent in the same period.
Mr. Lazaris is one of a number of former Bay Street investment executives who have struggled after leaping into the increasingly competitive hedge fund sector. After a 20-year boom in hedge funds, which now manage over $2-trillion of assets globally, Canadian newcomers are struggling to attract investors at a time when markets are volatile and clients critical of expensive management and performance fees.
This environment has made it particularly challenging for smaller funds. It is hard to attract clients if returns are low and big institutional investors, such as pension funds, typically don't invest in hedge funds with less than $1-billion of assets under administration.
Red Sky was founded five years ago by Mr. Lazaris after he left a 14 year career with GMP Capital Inc, where he was a managing partner.
Another newcomer who has faced headwinds is Richard Phillips, CEO of East West Investment Management. Mr. Phillips, formerly deputy chairman of CIBC World Markets, founded East West five nearly years ago. After delivering a large 22 per cent return on its East West Canada Fund in 2010, the fund has since delivered disappointing annual results of between 2.8 and 5.7 per cent. In the last three months the fund has delivered negative returns, lowering its gain for the year to date to 5.62 per cent.
East West announced Thursday it is joining forces with another struggling hedge fund, SW8 Asset Management Inc., which was founded by former RBC Capital Markets trader Matt Skipp. SW8 Strategy Fund reported a negative return of 2.51 per cent for the year to date as of October.
A spokesman for East West did not respond to a request for comment.