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John Wilson, CEO and CIO of Sprott Investment Management.Tim Fraser/The Globe and Mail

Sprott Inc., the Canadian money manager that made its name investing in gold, sees the balance of power shifting in Canada's corporate-bond market, and it wants in.

Sprott is boosting its exposure to the fixed-income market with a new $500-million hedge fund focused on corporate bonds, joining a wave of investors that have moved into similar strategies since the 2008 credit crisis.

The fund plans to take advantage of the opportunities opening up as sell-side banks back away from their traditional role facilitating bond trades, portfolio manager Mark Wisniewski said. The banks' retreat has made bond trading the hardest its been since the financial crisis, but also lucrative for buy-side investors who can quickly raise cash once provided by banks, Mr. Wisniewski said.

"The opportunity set is now shifting to the buy side from the sell side," he said in an interview in Bloomberg's Ottawa office. "It's awesome because right now you can buy things at great prices that people want to sell."

Investors have complained liquidity – the ability to trade without triggering price swings – has been draining from the bond market as new global regulations since the financial crisis make it more expensive for banks to hold riskier assets and act as middlemen in the bond market.

Corporate-bond inventories held by the 22 dealers that trade with the U.S. Federal Reserve have dropped 18 per cent since April, 2013, according to the central bank. Figures are harder to come by in Canada, but four of the country's six largest banks are on the Fed's list.

"The sell side used to have access to capital, so what did they do? They'd get in front of you when you were trying to buy something," Mr. Wisniewski said. "So you would see it after they bought it, at a marked-up price. Now they're saying we don't want to buy it, you put a price on it."

Sprott joins a number of fixed-income and credit-focused hedge funds that have started in Canada since the financial crisis, from RP Investment Advisors to East Coast Fund Management to Lawrence Park Capital Partners.

Fixed income makes up about $750-million of Sprott's $8-billion under management. The firm, which has a glittering 100-kilogram gold coin in its Toronto office, is seeking to double its total assets to about $16-billion in the next three years as it diversifies away from resources into areas such as stocks, and fixed income. Founded in 1981 by gold investor Eric Sprott, the company's $2.5-billion in physical bullion still makes up a large chunk of its assets.

Hedge funds are capable of coming up with cash quicker than mutual funds because they're able to borrow money by shorting securities. That allows Sprott to lever up its investments, turning a 2-per-cent yield into 4 per cent by investing two borrowed dollars for every one held and beating the near-record low yields – just 2.4 per cent on average last week – in the market, Mr. Wisniewski said. The downside of leverage is that losses would be just as amplified as those returns.

Mr. Wisniewski says limiting his leveraged investments to debt from firms deemed safest by the credit-rating companies limits that risk.

"I have higher quality, but I'm putting the leverage on it, as opposed to buying a higher-yield company that has a lot of leverage on it in a business that I'm not too sure how sustainable it is," he said.

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