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Hedge Fund Manager Mamdani Yearns for Volatility After 33% Gain

Hedge Fund Manager Mamdani Yearns for Volatility After 33% Gain

(Bloomberg) -- A Canadian hedge fund that earned fat returns last year betting on chaos in the financial markets is finding the world is too stable to try to repeat the feat in 2017.

Hanif Mamdani, who oversees about C$7 billion ($5.37 billion) as head of alternative investments at Royal Bank of Canada’s RBC Global Asset Management, said he’s waiting for opportunities while sitting on a pile of cash as a position heavy in energy company bonds unwinds. The C$1.6 billion PH&N Absolute Return Fund has returned 4 percent this year compared with 33 percent for all of 2016.

“You shouldn’t expect to make outsize returns with a starting point where valuations are very fair or even on the rich side,” Mamdani said by phone from Vancouver. “If you are making outsize returns, you’re probably taking too much risk.” The 2016 gain “was very anomalous, clients shouldn’t seek that every year.”

Last year began with the right ingredients to generate strong returns: swathes of the market were mispriced, including the debt of energy companies, bonds in general had sold off and Canadian bank stocks were undervalued because of concerns about oil, Mamdani said. This year has been much more normal, he said.

The best-performing Canadian peer so far this year is the Kingwest U.S. Equity Portfolio, with a 12 percent total return, according to data compiled by Bloomberg. Of 13 other absolute return funds in the country, 11 showed less than a 4 percent return.

The CBOE Volatility Index has fallen 14 percent this year. Hedge funds often benefit from volatility that exposes price discrepancies between securities, allowing them to bet through short sales that some will fall. The strategy can be less effective when benchmarks such as the S&P/TSX Composite Index are mostly flat, as they are this year.

RBC’s Absolute Return fund expects to be about 40 percent or less invested in the energy debt this month, down from about 80 percent in September, Mamdani said.

When central bank intervention eases and interest rates are more normal, stock prices “can’t continue to simply go up without earnings support,” and that should provide opportunities for alternative funds that are well designed and have low fees, Mamdani said.

There are opportunities to be found in the price differences between real estate investment trusts that cater to the growth in Internet shopping -- for example by owning warehouses -- as opposed to those involved in more traditional retail, Mamdani said. He’s also considering banks that he says were overly punished for risks associated with the hot Canadian housing market. That window is closing though, after Warren Buffett backed the sector with loans to Home Capital Group Inc.

“There’s good earnings support, the stock market while fully valued is certainly not in bubble territory, so we see more of the same this year,” he said. “This is a time to be patient and not press things too much.”

To contact the reporter on this story: Colin McClelland in Johannesburg at cmcclelland1@bloomberg.net.

To contact the editors responsible for this story: Neil Callanan at ncallanan@bloomberg.net, Ross Larsen, Jon Menon