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)

Caveat Emptor

A while ago, I commented on the sudden collapse of Portus Alternative Asset Management. Well, sure enough, the process of trying to wind up the affairs of this company has begun, and the receiver, KPMG, is finding all sorts of interesting muck.

If it smells wrong, it probably is. Portus didn't seem right from the get-go when I first heard about it - partly it was my advisor's inability to explain just how a hedge fund would operate in the first place, but when I reviewed the marketing literature there was an opaqueness to the company. Once you handed them your money, they pretty much could play with it as they saw fit.

Now we find that the Portus people were doing a number of nasty little things - unsigned deals with other companies, millions paid out to "consulting" firms owned by the principals of Portus, monies funnelled off to banks in the Carribean - and these are what is coming out as KPMG begins the process of figuring out what had been going on with Portus.

When KPMG is having trouble unravelling the network of interactions that make up Portus' books, I can only imagine how complex and twisted the mess must be. Hedge funds themselves are not trivial entities to begin with, and Portus' concept of building a "Fund of Hedge Funds" is fraught with complexity and risk. Hedge Funds themselves are complex and secretive organizations, often playing games with money that most individual investors would simply not comprehend. (I can only barely wrap my meagre mind around the notion of 'selling short') The problem I see with hedge funds is that the lack of transparency means that the fund management can do "whatever they please", and the individual investor has little or no visibility into it. So, if the fund manager decides that he'll get a better rate of return playing the tables in Las Vegas, he can do that, and you have no idea or say in the matter.

Even in an era where we think that there is enough regulatory structure in place to keep these funds "honest", there's always someone who will find a new way to sell snake oil. I guess that Portus is a reminder to the individual investor to keep their wits about them.

Patience and All Things Will Come To You

... Even if you try to outrun them.

A couple of years ago the Portus Hedge Fund collapsed into the quagmire of bankruptcy and ... to no great surprise, corruption.

I didn't really have a clue how persistent the bankruptcy trustees are until in the early 1990s I discovered that KPMG still had Abacus Cities on the books as an active bankruptcy - for a company which had collapsed over a decade earlier.

Well, it would seem that the long arm of something far more persistent than the law has caught up with Boaz Manor, who fled to Israel shortly after Portus collapsed.

Mr. Manor was barred from leaving Israel under a court order, but the travel ban was lifted recently by the Israeli District Court, which imposed stringent requirements on his travel. He will be accompanied to the airport in Israel by his lawyer and a lawyer for KPMG, and KPMG's lawyer will accompany him on the flight.

“We are extremely pleased with the reported decision as it ensures that Mr. Manor will face justice in Canada while ensuring that the rights of the investors to recover assets from him are preserved,” KPMG senior vice-president Robert Rusko said in a statement.

Perhaps the more distressing part of this is the impact of Manor and his companions on the assets of investors:

Also Tuesday, KPMG said it has made an interim payment to Portus customers who lost money when the company collapsed. The initial payment of 15 cents on the dollar of proven claims will go to more than 16,000 customers. The cheques were mailed on Oct. 22, the receiver said.

Yes, any investment has a risk to it. I appreciate that. But to lose 85 cents on every dollar - especially when Portus was talking about a "buy-in" amount that was around $10,000 minimum, that $10,000 translated into an $8500 loss. Ouch! (Even more ouch for investors who played more money into it)

I look forward to Portus' leadership facing justice. I was more than a little bit upset to learn that Manor had "skipped town".