TMX Group Ltd T.X

Hedge funds and TSX Group

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Courtesy of Robinbrook on the $TRSTS forum: Hedge funds poised to be the 800-pound gorilla on the income trust curcuit DEREK DECLOET 00:00 EST Saturday, Sep 10, 2005 To begin, a confession: We have no idea where the stock market is going in the next year. No one does, really. Anyone who tells you he can consistently call the level of the S&P/TSX composite six or 12 months out is (a) delusional, (b) a charlatan, or (c) a Bay Street economist who's well paid to generate such predictions, despite the impossibility of the task. Probably both (a) and (c), come to think of it. But one thing can be said with a fair bit of certainty. Hedge fund managers are going to rule like never before in the Canadian equity market as it enters a new, and particularly odd, phase in its evolution. They will earn the big returns in the next year, because, frankly, they are not as chicken as others on Bay or Wall Street. The week's big story was Ottawa's timid response to income trusts, which have been multiplying like fungi. Finance Minister Ralph Goodale is a master of the art of using a thousand words where 10 would do, and this charming trait has apparently rubbed off on his mandarins. The Finance Department's discussion paper, page upon page of statistics and commentary, could be boiled down to this: Trusts cost us tax revenue, but we've no clue whether we should do something about it, so -- we'll ask you. One executive called it "fluff," and he could not have been more accurate. But fluff is exactly what the hedge funds want on this issue. By "consulting" until year's end, before a likely election next February or March, Mr. Goodale has signalled Ottawa will do nothing to halt the trust boom for at least eight months, probably longer. So it's game on for the hedgies, who have been presented with a unique (and probably short-lived) opportunity to use their boldness to beg, browbeat, and bully CEOs into turning their firms into trusts. Trust conversion nearly always generates a quick burst in the stock price -- during which the more clever managers can sell -- for logical reasons. Any company's stock price is nothing more than the market's estimate of its total worth, usually defined as the total of future cash flows, discounted to today. Income trusts get higher multiples because the taxman gets less and the investor more. Period. We have already witnessed the growing muscle of the hedgies in this field, as they've badgered executives and directors at Manitoba Telecom (unsuccessfully) and Cinram International (successfully, it appears) to go the trust route. Prepare for the deluge, because most of the good arguments for CEOs to refuse have melted away this summer. No longer can they claim that trusts are the domain of the plodding and slothful; GMP Capital and Precision Drilling are not unambitious companies. Nor can they use the fear of an imminent federal crackdown on trusts. Waffling and stalling are Liberal specialties in this minority Parliament. Hedge managers are the only ones who can take full advantage of the trust wave. Most are small enough to get in and out of stocks quickly. The too-polite mutual funds business, replete with bloated funds in a small market, can't match hedge funds for nimbleness. Most important, the hedgies have the financial motivation -- performance fees -- to be pushy, even to those firms who've done nothing to earn it. A couple weeks ago, we got a call from Paul O'Neil, a Canadian who works for Omega Advisors, a well-known Wall Street hedge fund that helped persuade Wendy's to spin off Tim Hortons. Omega, it turns out, is also a shareholder in TSX Group, parent company of the Toronto Stock Exchange. If you were prescient enough to put $1,000 into TSX when it went public in 2002, you'd have more than $5,000, including dividends. Everything is going along nicely. But Mr. O'Neil wants conversion. "It's an absolute definition of a perfect trust," he says. All that's needed is a few large investors to start putting on the pressure, and "it would be pretty much unstoppable," he says. Oh, yes: TSX Group shot up 7.5 per cent the day the Finance paper was released. Anyone care to guess whether hedge funds were the biggest buyers? [e-mail]