How 2 hedge fund award winners deliver returns

Loren Francis, vice-president and principal of Highview Financial Group, and Craig Machel, an investment advisor with Richardson Wealth, were the event’s inquiry panel, putting the CEOs in the hot seat.

The Bedford Park Opportunities Fund placed first for the best one-year return in the equities category. Launched in 2018, the fund focuses on Canadian small- and mid-cap stocks, and had a return of 58.6% in 2024, compared to the S&P/TSX Small-Cap Index’s total return of 18.83%. Since inception, annualized returns have been about 16%, Zinberg said.

“Even a very small allocation to a small-cap fund can really help your overall portfolio returns,” he said.

But it’s a bumpy ride. Zinberg suggested a 5–12% weighting and investing through the cycle to “catch these big swings” in performance.

The fund could be “a great strategy” for the growth part of a portfolio, Machel said, adding that, with the fund’s volatility, “committing to the long term is going to be how you win.”

The fund comprises 20 to 25 names — companies with annual high-growth rates of about 20% and market capitalizations of $100 million to $5 billion. “They have enough track record that you can really analyze the business, but they’re still small enough that the bigger pools of capital haven’t come in yet,” Zinberg said. “That’s a big part of our edge and our opportunity.”

The stocks are also chosen based on the companies’ management, which must have “a lot of skin in the game,” he said, referring to ownership. Bedford also looks for companies with positive share price momentum and valuations that are about half the target 20% growth rate. “We don’t really want to pay more than 10 times earnings per business,” Zinberg said. “If you can find companies like that, you should do very, very well over time.”

Holdings include Calgary-based frac-sand provider Source Energy Services, and Toronto-headquartered online lender Propel Holdings Inc.

Zinberg said a stock’s weighting in the fund starts off small — 1% or less — and is gradually increased based on earnings. With positive performance, “we’re going to be buying more stock as it goes up [in price],” he said. While some investors may find that approach counterintuitive, it’s efficient, he said, because “it allows you to add to winning stocks over time.”

The fund sells a position when the company’s growth slows, its valuation expands, or a better opportunity arises, Zinberg said.

Given that the small-cap market has less liquidity relative to the large-cap market, trading requires specialized skills. “Experience is really important in terms of how to trade these names, knowing which brokers trade which stocks, knowing how well-owned, institutionally, various stocks are,” Zinberg said. “These are all things you need to know [as a manager].”

Venture debt fund provides uncorrelated returns

The Espresso Venture Debt Trust placed first for the best five-year return in the private debt category and second for the best three-year return in the category.

From 2017 to Q2 2024, the fund’s net average return was 8.9%, with a standard deviation of 1.1%. According to benchmark data from PitchBook, those figures are 8.1% and 4.8%, respectively, for the private debt category. The fund also has low correlation to private debt and other categories.

Espresso lends to high-growth software companies in the U.S., U.K. and Canada that have $10 million to $50 million in revenue (mid-stage companies) and are backed by a venture capital sponsor.

Software companies tend to be resilient, with “higher attainment of their forecasts,” Jivraj said.

And based on data, venture capital sponsorship is “an important distinction in terms of performance,” compared to unsponsored or corporate-sponsored companies. “The sponsor acts as a backstop to tide you over in tough times,” plus adds value by optimizing pricing on deals and providing strategic relationships, he said.

Espresso lends borrowers up to $30 million. The deals tend to be sub-20% loan-to-value and short term (three to five years), which helps keep loan losses low. Interest is set at a 9%+ premium to the benchmark secured overnight financing rate (SOFR), paid monthly. Covenants provide protection when revenue growth falls to a certain level — “a wonderful early warning indicator” about a company, Jivraj said. Warrant coverage is low, in part so that “we can provide investors assurance of performance through good cycles and bad cycles.”

The active management strategy includes trading warrant-based sources of income for cash, he said. Maximizing cash income “reduces volatility, reduces marking up and marking down of unrealized gains, which gives rise to very little correlation [with other asset classes],” he said. Investors receive largely interest income.

The firm’s loan losses since its 2016 inception are just below 1% annualized, he said, and, for the past seven years, about 70 basis points.

A decade ago, Espresso began experimenting with machine learning, he said, and the firm has digitized loan operations — “capturing every single data element around a loan and a loan transaction.” The data was initially used to automate loan reporting, and then the firm began using it to analyze borrowers’ financial models and identify risk signals that could affect borrowers’ performance.

“We’re now using that [data] to train more sophisticated predictive models,” Jivraj said. “Our goal is to extend the horizon in which we can accurately say, ‘This is how I think this borrower will do.’” Including macroeconomic data in the mix will provide for a dynamic process of risk analysis, he said.

When a borrower is in trouble, “speed matters,” Jivraj said. “The earlier you engage when it’s just maybe a minor issue, as opposed to something that’s critical, [makes] a huge difference in driving loan outcomes.”

Amid the trade war and lowered GDP expectations, he said he expects some “choppiness” ahead, but he also expects the U.S. IPO market to improve and less regulation to drive more mergers and acquisitions. The U.S. accounts for 80% of Espresso’s business (40% of Espresso’s loans exit through acquisition, he said, and another 40% repay Espresso by raising cash with equity rounds). “If you’ve got U.S. exposure, I think that’s a good place to be this year and next,” he said.

Francis said the fund could be part of the fixed-income side of a 2% or so allocation to alternatives (though she noted, given the fund’s liquidity restrictions, it could be considered fixed income with a “slight” risk profile).

The fund would work well in a registered account as “a compounding growth story,” Machel said, or as income, and would help provide stability across a portfolio. “In times of uncertainty, which is where we are today — and we’ll be back here again — 8 or 9% is pretty attractive.”