Yikes!

About six or eight months ago, I was looking around for a new investment vehicle for my RRSPs. I wasn't too worried about being able to "touch" the money - after all, I don't plan on retiring for a few years (decades?) yet, so I wanted a vehicle that I could look at as a long term buy-and-hold play - steady returns and a reasonably solid base being key things I'm looking for.

One of the people I talked to proposed that I put my money into Portus funds. They were a newer product, and at that moment in time were showing significant gains. The salesman didn't seem to quite understand what the 'game' Portus was playing on the markets really meant - fair enough, he's been in the financial services sector for the last 40 some years - or longer. He's semi-retired now, and probably doesn't know every trick in the book, as there always seems to be one or two new ones coming along. He said he wanted to get a rep in from Portus to explain things in more detail.

It turns out that Portus was basically creating a 'sort-of'-a-mutual fund' based on what are called "Hedge Funds". I say "sort of" because the resulting fund isn't bound by the same kind of transparency and accountability rules for unitholders as a classical mutual fund. More troubling than that to me was the notion of how Hedge Funds operate - they basically seem to play a "market timing game" by aggressively selling short stocks on their downswing, and (they hope) selling other stocks on their peaks. (Great theory, but anyone who has a clue about game theory will recognize the problems with playing double-ended probabilities off each other like that...) The second point about Hedge Funds is the fact that a Hedge Fund manager basically has 'carte-blanche' with your money - if he decides the best returns to be had involve him spending a day at the roulette wheel of a casino, that's up to him.

Traditionally, Hedge Funds have had approximately a $1,000,000 minimum entry buy. Basically, if you don't have a million bucks to lose, go home. (trust me, I don't have anywhere near _that_ kind of money myself!)

The other thing that bothered me about Portus was the apparently obscure legal and financial structures the company was employing. Something, and I couldn't tell you what, just felt horribly wrong about it. Most funds will tell you that they are going to use such and such a strategy - whether it's buying foreign stocks, or following one of the market indexes. These guys skirted around those questions with answers that felt incredibly evasive to me.

The Portus representative tried to convince me that my funds were "guaranteed" by Portus. Now, if Portus had a spare billion or so sitting in the bank, I might almost believe it. Instead, what they were doing is putting a percentage into securities with RBC Dominion that had actual guarantees against them. (So, we are not talking an "insured risk" guarantee here, basically these guys were playing a game - self-insure and then hope like hell nothing happens.)

Fast forward all of 6 months, and we start seeing articles like this in the Globe and Mail. Just for giggles, the Ontario Securities Commission (OSC) has suspended Portus' funds and assets as a result of their investigation of this bunch.

Really, does this point to a "problem" in the market place? No. It's just a stark reminder of the rule - Caveat Emptor. Follow your instincts, and back them up with facts. If the investment doesn't wind up looking good, find another path. (Interestingly, I did that, and the money involved has done quite nicely this year - in spite of a mild drop in the early fall)