Sprott Inc. is trying to find ways to broaden its line of investment products while remaining true to the firm's belief that the financial system is in big trouble. The firm thinks it has found part of the answer in Flatiron Capital Management Partners.
Flatiron is a hedge fund business with $275-million in assets, running a strategy involving convertible bond arbitrage that's designed to produce income and protect investments in a down market. The companies have a letter of intent for a cash and stock purchase by Sprott. No price is being announced.
Sprott's long-held belief, starting with founder Eric Sprott, is that the world's financial system is nowhere near fixed and it's going to get worse before it gets better. For years, the firm and its investor clients profited from that belief through investments in energy and gold, which soared. However, those investments have soured in recent months, leaving Sprott looking for ways to diversify to offer new strategies to clients that have smaller ups and downs than other products the firm offers.
"People just want to eliminate the volatility from their portfolios," Sprott chief executive officer Peter Grosskopf said in an interview.
The Flatiron strategy to date has been to buy convertible bonds, which provide an income stream from their coupon payments, then hedge out the equity exposure, by shorting the stock of the same company. The result is designed to provide returns that are steady and uncorrelated to the equity market.
Flatiron founders Steve Duenkler and Parm Kalirai have booked average annual returns of 9.54 per cent, after fees, since 2000 by running the strategy. The TSX in that time has averaged 5.4 per cent per year.
The strategy runs at one-quarter of the volatility of the TSX Composite Index, Mr. Duenkler said, and has provided positive returns in 85 per cent of months in the dozen years the team have been active.
With Flatiron, "the really compelling opportunity is to develop a defensive product in convertible arbitrage that fits with our view of the world," Mr. Grosskopf said.
Mr. Duenkler said that Flatiron was interested in joining Sprott because the firm's network of fund sellers would provide a way to reach retail investors.
"At our size, it's hard to go out and do that on your own," Mr. Duenkler said.
On the other side, Mr. Grosskopf said that Flatiron's connections to institutional investors may provide an opportunity for Sprott to find new clients.
Mr. Grosskopf said that Sprott is looking to have a product based on the Flatiron strategy available very quickly, perhaps in just two or three weeks.