Canadian Hedge Watch

1. Q U A R T E R LY R E V I E W O F H E D G E F U N D S & A L T E R N A T I V E I N V E S T I N G JULY 2010 VOLUME 10 ISSUE 7
FORECASTING BEYOND
THE CREDIT CRISIS – REVISITED
CANADIAN INCOME TAX TREATMENT OF DERIVATIVE GAINS AND LOSSES
HIGHWATER DIVERSIFIED OPPORTUNITIES FUND
PEOPLE ON THE MOVE OLYMPIAN L/S EQUITY FUND, L.P.

2. Performance Summary
June
YTD
2010
CHW HEDGE FUND INDICES (CHW-HF) % %
CHW-HF Composite Index -1.12 -1.52
Tony Sanfelice, President -1.33 -1.87
CHW-HF Equity Hedged Index
Canadian Hedge Watch Inc.
CHW-HF Notes Index 2.92 2.02
CHW-FOHF Index -0.33 0.70
Canadian Hedge Watch Introduces Scotia Capital Canadian Hedge Fund Index
New Magazine SC CDN HF Index Asset Weighted 0.42 3.90
SC CDN HF Index Equal Weighted -0.60 1.16
Canadian Hedge Watch is proud to introduce a new addition to
our family of unbiased news and reporting vehicles. We welcome CSFB/Tremont Hedge Indices
Canadian ETF Watch magazine, launching soon. Along with this CSFB/Tremont Hedge Fund Index -0.84 -2.76
new addition we will be incorporating the quarterly newsletter
along with the monthly issue as one comprehensive guide to Convertible Arbitrage 0.01 -2.51
investing and forecasting the trends and environment surrounding Dedicated Short Bias 5.45 5.84
the alternative investment space.
Emerging Markets -0.03 -4.28
In this month’s CHW issue we explore several key areas of the
Equity Market Neutral -0.99 -3.30
financial sector that are developing within the alternative space.
Interviews with two of Highwater Capital Management’s key Event Driven -1.58 -3.07
players; Ara Nalbandian, CFA Portfolio Manager and Matt Manara,
Distressed -1.10 -2.50
Regional Sales Manager, as they walk readers through an in-depth
look into Highwater’s approach to investing in their hedge fund. Event Driven Multi-Strategy -1.97 -3.53
An interview with Michael J. Levas from Olympian Capital L.L.C. Risk Arbitrage 0.10 -1.52
in Fort Lauderdale, Florida, gives you an account of how they 0.92 -0.79
Fixed Income Arbitrage
successfully analyse and manage their funds while digging deep
into their investment process and their approach to risk Global Macro 0.56 -0.63
management. Michael further explains his outlook on the markets Long/Short Equity -2.07 -4.13
and forecasts future trends.
Managed Futures 0.42 -4.03
Stan Maj of Ernst & Young LLP looks at the Canadian Income Tax
Treatment of Derivative Gains and Losses. Providing guidance to Multi-Strategy -0.81 -2.19
tax auditors and digging deeper into the four recent interpretations GLOBAL HEDGE FUND INDICES
from Canada Revenue Agency (CRA) will give you an insight into
CRA’s assessing practices regarding derivative financial instruments. Hennessee Hedge Fund Index -1.35 0.20
HFRI Fund Weighted Composite Index -0.86 -0.21
Philip Niles from Butterfield Fulcrum forecasts beyond the credit
crisis, revisiting the four-part series from 2009 concluding that HFRI Equity Market Neutral Index -0.71 -0.69
there were more difficulties yet to come in the equity markets.
HFRI Fund of Funds Composite Index -0.70 -1.03
He looks into the changes that have occurred since last year and
finds some new evidence suggesting that we may be moving in MARKET INDICES
the right direction.
MSCI World Index (C$) -1.51 -8.53
Whatever 2010 holds for the industry, fund managers will
MSCI World Index (US$) -3.93 -9.55
continue to demand ever-more sophisticated services and
technology from their service providers. MSCI Emerg Markets Free Index (C$) 1.21 -4.97
Dow Jones 30 Industrial Average (US$) -3.58 -6.27
NASDAQ Composite Index (C$) -4.73 -5.99
NASDAQ Composite Index (US$) -6.55 -7.05
S&P 500 Total Return Index (C$) -3.39 -5.59
S&P 500 Total Return Index (US$) -5.24 -6.65
Canadian Hedge Watch appears live on
S&P/TSX Composite Index Total Return -3.98 -3.85
BNN – Business News Network each month.
www.canadianhedgewatch.com

3. C O N T E N T S
J U L Y Q U A R T E R L Y
FEATURES DATA
Forecasting Beyond the 2 Hedge Fund Performance Tables Q2 18
Credit Crisis – Revisited
Philip Niles, Butterfield Fulcrum Graphs and Tables Related to Asset Size 28
and Distribution of Canadian Hedge Funds
Canadian Income Tax Treatment 4 Number of Hedge Funds Reporting 28
of Derivative Gains and Losses Number of Hedge Fund Managers Reporting 29
Stan Maj, Ernst & Young LLP, Toronto
Hedge Funds Reporting Assets 30
Hedge Funds Assets Under Mngment. (AUM) 31
Highwater Diversified Opportunities Fund 6
Ara Nalbandian, Highwater Capital Management
Hedge Fund Asset Change 32
Distribution of Canadian Hedge Funds by Asset Size 33
People on the Move 8 Reported Canadian Hedge Fund Assets by Fund Manager 34
Matt Manara, Highwater Capital Management Average Asset Size of Canadian Hedge Funds Over Time 35
Monthly Average Return (Equally Weighted) 36
Olympian L/S Equity Fund, L.P. 10 Distribution of Returns in the most recent Quarter 37
Michael J. Levas, Olympian Capital Management LLC. Distribution of Monthly Average Return 38
(Equally Weighted, since December, 1994)
Around The Hedge 12 Quarterly Average Returns (Equally Weighted) 41
12-month Rolling Standard Deviation (annualized) 42
2010 Calendar of Events 52
Performance Comparison: 43
Canadian Hedge Funds vs. Major Indices
Commentary 43
Comparison of Returns 44
Efficiency and Calendar Year Returns 45
Correlation Matrices 46
Canadian Hedge Funds Introduced in the Last Quarter 47
Canadian Hedge Fund Indices – June 2010 49
Contact Information
Canadian Hedge Watch Inc.
20 Toronto St., Suite 820, Toronto, Ontario M5C 2B8 tel: 416.848.0277 ext. 2269 toll free: 1.877.249.9249 fax: 416.848.0278
Editorial, Media & Advertising: finucci@canadianhedgewatch.com Subscriptions: subscription@canadianhedgewatch.com
Canadian Hedge Watch is published 11 times per year by Canadian Hedge Watch Inc. We welcome articles, suggestions and comments from our
readers. All submissions become the property of Canadian Hedge Watch Inc., which reserves the right to exercise editorial control in accordance with
its policies and educational goals.
Disclaimer
Canadian Hedge Watch (CHW) presents news, information and data on both Canadian and Global alternative investment activity. The information presented is not to be
taken as an endorsement, investment advice or a promotion for the organizations and individuals whose material and information appears in this CHW publication or on
the Canadian Hedge Watch website.
The material presented, separate from paid advertisements, is for the sole purpose of providing industry-specific information. As with all areas of financial investing, CHW
recommends strongly that readers should exercise due diligence by consulting with their investment advisor or other trusted financial professional before taking any action
based upon the information presented within these pages.
Volume 10 Issue 7 - July 2010 1

4. Forecasting Beyond the
Credit Crisis – Revisited
As the keen reader may recall, I did a four-part series in Canadian Hedge Watch approximately one
Phil Niles year ago which sought to extrapolate beyond the then current market conditions using three key
metrics: the Dow/Gold ratio, the stock market Price/Earnings ratio, and the current level of the
money supply. Given that many seem to feel that we have moved beyond those gloomy days,
re-examines where I thought it would be worth re-examining where we currently stand using these same three metrics.
What do these three statistics now indicate, with the benefit of an additional twelve months of data
and a healthy dose of further perspective? We will begin with a quick refresher of those metrics, how
we currently stand they are to be used, and what they can indicate about the direction our markets are heading.
Our Metrics Re-Introduced
on credit crisis The Dow/Gold Ratio – defined simply as the ratio of the Dow Jones Industrial Average to the price
of gold in the spot market. It has long been seen as one of the most sought after indicators
pertaining to relative value in the market. As we have seen over the past year in a variety of the
world’s major currencies, holdings in cash can come in and out of vogue and, by extension, the
value of the currency can fluctuate as much as stock markets in general. This generally will shift
the focus in and out of gold.
The Price/Earnings ratio – probably the most famous financial metric, the P/E ratio is a
representation of what price must be paid per dollar of earnings in the underlying investment. In this
examination, we will be using the Dow Jones Industrial Average as the underlying proxy for the
market as a whole. Frequently, the level of the stock market’s P/E ratio can be used as a descriptive
statistic pertaining to investor confidence; in good times, investors are willing to pay more for stock
market earnings based on the perception that the good times will keep on rolling. Of course, the
opposite must hold true in down times and hence why the P/E ratio can act is a good proxy for
market exuberance.
The Money Supply – very generally, the money supply is the total amount of money held throughout
an economy at a particular point in time. The basic definition involves two major components: the
total currency in circulation as well as “demand deposits”, or the amount held in current accounts.
In this example, we will be using M1 as the definition of the money supply, given its lengthy track
Philip Niles
record of calculation as well its simplicity.
Butterfield Fulcrum
Our Examination Reprised
We begin with the Dow/Gold ratio. From the initial examination, we found that underlying secular bear
markets usually ended with a Dow/Gold ratio somewhere around 5, with the very bottom in the early
1980’s being around 1. At the time of writing last year, the Dow/Gold ratio was calculated as follows:
Closing level of the Dow Jones Industrial Average 9,015.10
The Price of Gold (US $/oz) $843.15
Dow/Gold Ratio 10.69
If we fast forward to the end of June 2010, we are faced with the following figures:
Closing level of the Dow Jones Industrial Average 10,434.17
The Price of Gold (US $/oz) $1,239.74
Dow/Gold Ratio 8.42
2 www.canadianhedgewatch.com

5. So from the above comparison, we can see that the Dow/Gold ratio has We identified that the secular bull markets began with peaks in M1 while
dropped, and indeed it has dropped by more than two full points to rest secular bear markets began with troughs. As such, if the current
around 8.42. Most noticeably, and not unsurprising given the weakness difficulties in the market were coming to an end, we would expect M1 to
seen in the currencies of the world, the price of gold has risen be at a peak. Furthermore, we can see that the annual rate of change at
dramatically. While this revised ratio would certainly lend credence to the the end of the examination period was however around 0%, but one
notion that we are nearing the bottom of a secular bear market trend, could perceive a general upward shift.
history would indicate that we are still not quite through. To reach a ratio
Without further ado, this author can confirm that the US Federal Reserve
of 5, we would need to see the Dow Jones Industrial Average drop to
reports the annual change in M1 from May 2009 to May 2010 to be 7.0%.
around 6,200 (assuming gold prices hold steady) or see the price per
Certainly this is an increase from what was observed last year, but it is not
ounce of gold rise to more than $2,000 (assuming a similar absence of
necessarily at the peak one might expect. The figure of 7.0% is
change in the Dow). Even more noticeable changes would have to occur
approximately what was witnessed in the early 2000’s in the effort to
to get us down to the all-time low from the early 1980’s. As mentioned in
counteract that economic downturn, hardly a standout peak for the
the original study, it would likely be a combination of the two that would
statistic. Early in the 1980’s, at the close of the last secular bear market,
bring about a lower ratio, but regardless of whether you are a stock
the annual change in M1 hit double digits. Though the secular bear
market bear or a commodity bull, history is calling for further change.
market before that one featured a high single digit annual change in M1,
The price/earnings ratio of the Dow Jones Industrial Average is similarly it would be reasonable to expect a figure higher than 7.0% to signal the
telling. To recap, at the time of writing the initial article, the Dow was end of the current secular bear market.
sporting a P/E ratio slightly in excess of 13. As of the end of June 2010,
the Dow is reflecting a P/E ratio of approximately 15.6. The potential Conclusion
reasons for this increase in the P/E ratio are many: heightened consumer The four-part series from 2009 concluded that there were more difficulties
confidence in the future of the markets, a return of capital to the markets yet to come in the equity markets, using the Dow Jones Industrial Average
following the credit crisis, and a decrease in DJIA earnings are all potential as a market proxy. Using the same three metrics (the Dow/Gold ratio, the
factors. The important thing to note is that, regardless of the reasons for Price/Earnings ratio of the DJIA, and the change in the level of the money
the change, the ratio has actually increased. From our previous supply), the revised examination performed with current data seems to
examination from 2009, we found that the bottom of the secular bear indicate that we are not out of the proverbial woods just yet. All three
markets in recent history featured a P/E ratio on the Dow Jones Industrial ratios, when taken together, seem to be indicating a general move in the
Average that was less than 10, even as low as approximately 5. This is a right direction towards the end of the current secular bear market, however
far cry from where the market currently stands and, to be sure, it is striking the movement has not been especially pronounced. In fact, as mentioned,
that the P/E ratio has actually increased over the last year. the P/E ratio has actually moved in the opposite direction. As a final telling
statistic, reprinted below is the table from the original study outlining the
The money supply is our third metric for study in this examination and,
last six secular market trends, their average returns, and their durations:
perhaps, the least understood. If you recall from the study of a year ago,
we do not particularly care about the absolute level of M1, but rather the
year-over-year change in the level of M1. Most will not be surprised to
Table 1: Dow Performance During Secular Bull and Bear Markets
learn that the absolute level of M1 has risen dramatically over the last
year or so. In an effort to stimulate the economy, the powers that be in the
Secular Duration Average Secular Duration Average
United States have released a great deal of cash into the market to easy Bear (Years) Yearly Bull (Years) Yearly
the liquidity concerns that have been such a plague. But where does that Markets Return Markets Return
leave us with respect to the underlying secular market trend? Recall the
1906-1921 16 1.58% 1922-1928 7 17.20%
graph from 2009:
1929-1949 21 1.69% 1950-1965 16 10.60%
1966-1982 17 1.59% 1983-1999 17 15.30%
Figure 1: Change in the Level of the Money Supply (M1) 1959-2008
Source: The Author (2009)
From the above table, we can see that the average duration of the last
three secular bear markets has been a lengthy eighteen years. Eighteen
years. Given this fact, and the previously presented statistical analyses,
it would seem optimistic to expect the current trend to be already
reaching its conclusion. Really, taking this average duration, we would be
only just passing the half-way point of the current secular market trend.
Without a doubt, there will be bull markets for equity participants to enjoy
over the coming years, but the trend seems to be clear: we have got some
distance to go yet.
Source: The Author (2009)
Volume 10 Issue 7 - July 2010 3

6. Canadian Income Tax
Treatment of Derivative
Gains and Losses
Four recent Interpretations from the Canada Revenue Agency (the “CRA”) have provided insight into
Stan Maj provides the CRA’s assessing practices regarding derivative financial instruments.
These internal Interpretations were issued in March and April of 2010 by the Income Tax Rulings
insight into the CRA’s Directorate of the CRA. They provide guidance to tax auditors on assessing practices for gains and
losses arising from settlement of foreign exchange contracts used for hedging purposes. The issue
considered was whether the gains and losses should be on account of income or on account of capital.
assessing practices.
The four Interpretations address similar fact situations, but for different taxpayers. They are
noteworthy because they include a lengthy analysis and discussion of the issues.
Each taxpayer had used short-term foreign exchange contracts to hedge its exposure to foreign
exchange fluctuations on its net investment in foreign subsidiaries. The contracts were rolled over
regularly as they matured in order to maintain the hedge. The CRA concluded that income treatment
was appropriate. The guidance summarized in these Interpretations would likely be extended by the
CRA to other situations where derivatives are used to hedge foreign exchange risk, such as that
related to a foreign currency denominated investment portfolio held in an investment fund.
Several key court decisions that have considered this issue are referred to in the Interpretations.
Though different shades of interpretation are always possible, the CRA’s application of these
decisions to the particular facts appears reasonable.
A widely-accepted principle is that income treatment is appropriate for gains and losses on
derivatives. The reason is that these financial instruments are speculative by their very nature
because they produce no income, and a taxpayer can only profit by resale or settlement. At the
same time, the courts have concluded that the gain or loss from a derivative instrument that is used
to hedge a capital transaction should also be on capital account. The difficult issue is determining
when a derivative should be treated as a hedge for these purposes.
Stan Maj
Partner
Ernst & Young LLP, Toronto
4 www.canadianhedgewatch.com

7. In order to constitute a hedge there must be sufficient inter-connection or Tax uncertainty may be a greater problem for a fund manager than would
integration between the derivative instrument and the underlying be posed by either income of capital treatment. From the fund manager’s
transaction. The CRA states that a requirement for capital treatment is an viewpoint it may not matter whether the derivative contracts generate
actual or anticipated sale of capital assets. In other words, there must be gains or losses, or are on income or capital account, so long as they fulfill
linkage between the derivative and an underlying transaction rather than their purpose of providing a hedge against currency fluctuations. From
mere linkage to capital assets and liabilities. In ideal circumstances the the CRA’s perspective it is relatively easy to challenge the treatment taken
derivative instrument would be matched perfectly to the foreign currency for a particular fund because there is no bright-line test, and the
exposure both in terms of amount and timing. In the real world, however, circumstances rarely point clearly in only one direction. Of course, it can
circumstances are rarely ideal. The amount of the exposure typically be expected that any CRA challenge will be most aggressive when an
assessment will yield additional tax revenue for the fisc.
changes more frequently than derivative contracts can practically be
adjusted. Timing of crystallization is often either uncertain, or derivative Fund managers need to be aware that this issue is gaining greater profile
contracts are not commercially available for the anticipated duration. within the Industry and with the CRA. Steps should be taken to reduce
There is no clear answer to the question, “How close is close enough?” risk and uncertainly. Offering documents and other public information
should clearly state the manager’s intention when derivative instruments
The courts have found that the taxpayer’s intention when acquiring an asset are used as part of a hedging strategy. The manager may also want to
is a relevant factor when deciding whether income or capital treatment is warn investors of the potential risk for reassessment. Finally, proper
appropriate. Acquiring a derivative instrument with the intention of hedging execution of a hedging strategy is critical. The manager not only has to
foreign exchange exposure related to a capital asset supports capital intend to hedge but also has to execute in an inter-connected and
treatment, but intention alone is not sufficient. If it is found that the integrated manner.
acquisition was speculative, or a transaction to dispose of the underlying
capital asset is not foreseeable, income treatment may be appropriate. Stan Maj focuses on income tax matters related to the financial services
sector, and leads the asset management tax practice in Canada. Stan advises
The CRA has an administrative position that permits taxpayers entering
on tax compliance issues, and tax aspects of structuring and reorganizing
into foreign currency futures contracts to elect capital treatment as a investment funds. He is experienced with innovative fund structures and
“speculator” when doing so does not form part of the taxpayer’s business derivative instruments.
operations. Unfortunately, the CRA has decided not to extend this
administrative position to investment funds. Stan sits on the Taxation Working Group of the Investment Funds Institute of
Canada and the Industry Regulation & Taxation Committee of the Investment
Generally accepted accounting principles contain rules related to hedging Counsel Association of Canada.
that govern when a derivative instrument should be treated as a hedge for
accounting purposes. The CRA stated, and the courts generally agree, Stan’s previous roles include Vice President of Tax for Metropolitan Life
that accounting treatment does not determine tax treatment. Insurance Company and Vice President of Tax for Royal Bank of Canada.
He is a CA, a CPA, a lawyer and a Fellow of the Life Management Institute.
Volume 10 Issue 7 - July 2010 5

8. Highwater Diversified
Opportunities Fund
CHW What inspired the launch of the Highwater Diversified Opportunities Fund in 2007?
An interview with
Ara Nalbandian During my time as Senior Portfolio Manager at a leading Canadian fund
company, I achieved exceptional positive risk-adjusted returns for investors in the funds I managed.
Ara Nalbandian, CFA, I’ve always believed a contributor to this success was my conviction to investing fully directly
alongside fund investors. Aligning the interests of investors and managers is the best way for the
investment management industry to evolve. Highwater Capital Management Corp. was established
Portfolio Manager in 2007 and, in December of that year, the Highwater Diversified Opportunities Fund was launched.
Despite the challenges all managers faced during this period it has significantly outperformed North
American total return equity benchmarks by 33%. Rewarding performance is at the core of
- Highwater Capital Highwater Capital Management’s philosophy; delivering investor’s superior risk-adjusted returns
with a modest, highly competitive performance fee structure.
Management CHW How would you describe your investment management style?
AN Our management style could be described as diversified North American active value.
We apply a rigorous and disciplined approach evaluating individual companies from the bottom-up
on a fundamental basis. We are determined to generate consistent portfolio income through
dividends, income generating option strategies (i.e. covered call option writing) and active portfolio
management. We invest in a diversified portfolio of publicly listed North American securities
predominantly in mid and large cap equities and to a lesser extent fixed income securities including
preferred shares and convertible debentures. We maintain a concentrated portfolio of approximately
30 to 35 individual securities, however unlike conventional value investing strategies; we are active
in managing each of our positions to optimize income and total risk-adjusted returns.
CHW What is your process for unearthing companies/securities to include in your portfolios?
How do you create value in your portfolios?
AN We first start with identifying companies that exhibit superior operational metrics,
management expertise and shareholder-friendly behaviour. This can be demonstrated through
various factors including: a focused strategy, niche or strategic positioning, product innovations,
supply chain improvements, effective cost-containment, stable and increasing dividends and cash
flows, accretive acquisitions and aggressive share buy-backs. We then review a company’s
fundamentals on an absolute basis and relative to its peer group. Our focus is primarily fundamental
value-investing, however we do use a tactical approach to asset allocation as we consider the
Ara Nalbandian CFA FCSI DMS macro-economic backdrop when taking positions in individual securities, sectors and asset classes.
Portfolio Manager Once we have established our estimated intrinsic value and see potential for attractive risk adjusted
Highwater Capital Management appreciation, we build out a strategy to maximize the income from that particular security. We
continuously manage and adjust our positions to meet absolute return objectives. We use publicly
listed options to fine tune positions, produce tax efficient portfolio cash flow and reduce portfolio
volatility. Remaining disciplined in this process has contributed significantly to the Highwater Funds’
consistent outperformance of benchmarks and peers.
6 www.canadianhedgewatch.com

9. CHW Is the buy and hold strategy dead? CHW What is the most significant position you will take in a given
AN I wouldn’t go as far as saying that the buy-and-hold strategy is company or sector?
dead, but it has evolved. The discipline of value investing is still relatively AN While we maintain a concentrated portfolio targeting 30-35
young at just over 75 years old. Innovators like Warren Buffett inspired by companies, the fund’s exposure to any sector is generally capped at
the intellectual framework developed by Benjamin Graham in the 1930s 20-25% and individual company exposure is limited to 10% of the
helped value-investing develop and popularized the buy-and-hold
portfolio. The majority of our holdings are in large cap value, dividend
philosophy. The one constant in the world is change. The investment
paying equities while about 20% of the portfolio currently consists of fixed
industry is no stranger to evolution. Given the current range-bound market
income securities including preferred shares and corporate bonds. The
where investors are hyper-sensitive to periodic updates of economic and
result is a portfolio diversified by sector, asset class and various other
earnings data in the wake of the 2007-2008 recession, active management
tends to fare better relative to conventional buy-and-hold strategies. That sources of risk we monitor.
said, I would not discount the importance of owning well-run businesses
and purchasing them at a discount to their intrinsic value. Our approach CHW What other risks should investors consider when investing in
takes value investing to the next level by actively managing positions and hedge funds?
using income generating option strategies. We believe our approach is AN Investors should always look for a reputable auditor, an external
particularly suitable for the current market environment.
fund valuator and custodian as well as be cognizant of exposure to
private/ illiquid securities or individual sector overconcentration. We
CHW In current market conditions with the downturn of 2008 still
provide investors transparency of holdings with no private securities and
fresh in investor's minds, why should they consider equities and/or
a diversified portfolio. We have also established industry leading
hedge funds? What have you learned from the downturn in 2008 in
regards to protecting the portfolio and capital preservation? partnerships with leading Canadian firms in fund audit, valuation and
custody.
AN Dismissing equities and hedge funds altogether appears to be
a knee-jerk reaction to the challenges investors faced in 2008. Hedge CHW Where do you see the fee structure of Hedge Funds going?
funds retain some of the best and brightest asset managers our industry
has to offer and with increasing regulatory requirements the AN The typical fee structure for Hedge Funds tends to be a 2%
communication level between investors and money managers has management fee and a 20% performance fee if the manager generates
witnessed remarkable improvements in recent years. We believe equities positive returns in excess of a specified hurdle rate or high water mark.
are a key asset class for generating total returns and at current valuations We believe that this typical structure demonstrates the industry’s
are considerably attractive relative to bonds and other securities. In the propensity for excess and, as hedge fund investors become increasingly
past 25 years, there have been only two instances when the spread of the savvy, fund managers will need to adjust their base management fee
earnings yield on the S&P 500 and the 10-year U.S. treasury has been structures lower and place a greater focus on performance. The hedge
greater than the spread on long-term corporate bonds. The first time this fund industry is highly competitive, and if the goal is to make money for
happened was at the end of 2008, and the second is now. We are your investors, positive risk-adjusted excess returns should be the
becoming increasingly bullish on equities and continue to seek out
primary source of reward. The fee structures for Highwater’s Funds are
companies with strong balance sheets, recurring revenues and
extremely competitive earning management fees at about half the rate of
sustainable/growing cash flows.
its peers and collecting only a 15% performance fee on any positive
To answer the second part of the question, 2008 was a challenging year excess returns above our high water mark. In addition, the F-Class
for investors and managers alike, and in many ways it was a year of version (available to fee-based investment accounts at leading Canadian
edification. Money managers who deployed capital in income generating Investment Dealers) of the Highwater Diversified Opportunities Fund
securities and prudently employed leverage tended to insulate their charges a zero base management fee, making it a unique and attractive
portfolios from the broader market downturn. What we have learned from investment.
2008 is that the severity of black-swan scenarios cannot be under-
estimated simply based on the low frequency of occurrence. We took the CHW Where do you see Highwater Capital Management in five years?
opportunity to shield a portion of our portfolio by buying put options on AN We would like to continue doing what we do best, and that is
the S&P 500 Index during periods when the Volatility Index (VIX) was low manage assets and consistently produce outstanding risk-adjusted
relative to its historical average. While we use options on individual
returns for many years to come. We believe our disciplined strategies for
securities to enhance income, using them to short the index helps
diversified income through multiple sources and our unparalleled focus on
mitigate our risk in the event of a dramatic market decline. Just like buying
aligning our interests with our investors will continue to produce attractive
insurance, you don’t look forward to facing the negative outcome, but
risk adjusted returns and an increasing and happy client base.
you are glad that, if such an unlikely outcome occurs, you are protected
to some degree. Since the priority is to preserve capital, when the cost
Ara Nalbandian, CFA FCSI DMS, is a Portfolio Manager for Highwater
of buying portfolio insurance is low, it doesn’t hurt to have an added level
Capital Management. He specializes in absolute return strategies investing in
of market protection.
North American securities.
CHW Are hedge funds synonymous with leverage and/or risk? Ara started his career at Richardson Greenshields / RBC Dominion Securities
in 1996 and later joined BMO Nesbitt Burns in 1998. He was awarded the
AN While investors tend to consider hedge funds as high risk, the
Chartered Financial Analyst designation in 2000 and Derivatives Market
degree of risk can vary depending on the management style, the
Specialist designation in 2002. Mr. Nalbandian was most recently Senior
underlying securities and use of leverage. Hedge funds are not
Portfolio Manager at Sentry Select Capital Corporation, where he achieved
synonymous with risk. However, certain fund managers do use leverage tremendous success between 2000 and 2007. Since December 2007, he has
to add exposure in any combination of going either long or short the been the Portfolio Manager of the Highwater Diversified Opportunities Fund.
market. Our use of leverage is modest and we employ it opportunistically
to enhance our exposure to a diversified income generating portfolio of
securities and strategies.
Volume 10 Issue 7 - July 2010 7

10. People on the Move
Matt Manara was recently appointed Regional Sales Manager with Highwater Capital Management.
An interview with Canadian Hedge Watch asked Mr. Manara to discuss his role and the changes taking place.
Matt Manara, CHW Why did you decide to join Highwater Capital Management?
Matt Manara It was an easy decision. It is an excellent opportunity to be a part of an experienced
team with a solid track record of integrity and performance. It’s an exciting time to be a part of an
Regional Sales innovative and growing firm that is in the process of communicating our unique value added
approach to investment advisors across the country.
Manager - Highwater CHW What is your first priority in the sales department?
MM First priority would be to continue our sales momentum. Getting our story out to advisors
Capital Management that appreciate the value we create for their clients. I am very pleased with the tremendous positive
reception we’ve had in meetings with advisors. We will continue conducting meetings and getting
referrals nationwide.
CHW What is your unique value proposition?
MM Our value proposition is simple: proven performance, high level of transparency and
attractive low-cost structure. We provide direct access to an experienced and disciplined portfolio
management team. We conservatively run unconstrained concentrated portfolios that use options
to generate income and reduce risk. We give clients a service experience that is second-to-none.
CHW Where does Highwater Capital Management fit in the hedge fund industry?
MM We believe our funds are core holdings. Our strategy is called diversified North American
active value, but I tend to think of it like a long/short balanced fund. We are well diversified by asset
class and sector and use sophisticated tools conservatively to enhance risk-adjusted returns.
CHW Where do you see the current opportunity at Highwater Capital Management?
MM The opportunity is created thanks to the current market environment. We are well
positioned to take advantage of a flat market with a wide trading range. Our value-added option
Matt Manara strategies that produce income and reduce risk combined with a disciplined value approach put us
Regional Sales Manager in a great position to continue to generate absolute returns for our clients.
Highwater Capital Management Matt Manara, is Regional Sales Manager for Highwater Capital Management. As an honours commerce
degree graduate, Matt started his career in 2004 working on a senior investment team at CIBC Wood
Gundy. Through positions of increasing responsibility, he was named VP of Regional Sales at Mavrix Fund
Managment where he spent the last four years. Mr. Manara was an intricate part of Mavrix Fund
Management's exponential growth to a peak of $860 million. Matt has a wealth of knowledge and
experience in building and fostering new and existing relationships.
8 www.canadianhedgewatch.com

11. © 2010 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
KPMG. In step with market needs.
At KPMG, we understand We provide leading
that the Investment professional services
Management industry has within the domestic and
undergone sizeable offshore alternative
growth and change in the investments space,
past few years. The recent including: hedge funds,
credit crisis, the rise of venture capital funds, fund
GenY, and the forces of of funds, private equity
convergence and funds, commodity pools,
divergence have helped to and infrastructure funds,
make the industry a sea of as well as to the advisers
evolution and opportunity. that sponsor these
Integrated teams of investment vehicles.
professionals from our
Audit, Tax and Advisory For more information,
practices are helping to please visit us at:
provide clients with an in- www.kpmg.ca
depth understanding of
the markets in which they
operate, and offer
strategies spanning the
fund lifecycle from value
creation to realization.

12. Olympian L/S
Equity Fund, L.P.
CHW What is the background to your company and fund?
Canadian Hedge
Michael J. Levas The Company was founded in 2003 and this is our 2nd long/short equity fund
that was launched June 1st of this year.
Watch speaks with
CHW How and where do you distribute the funds? What is the profile of your current and
targeted client base.
Michael Levas, CIO, ML The funds distribution is primarily to high net worth and ultra high net worth investors and
also institutional investors i.e. fund of funds, family offices and other institutional investors that are
looking for alpha in their portfolios.
of Olympian Capital
CHW What is your investment process?
Management about ML The investment process is to capture at least 2 1/2% per trade either on the long or short
side. Momentum is also an integral part of the process and hedging instantaneously when a position
is either up or down substantially is also something that we look to capture on a daily basis.
their investment
CHW What is your approach to managing risk?
ML Risk is classified and dealt with as a non event. In other words we really don’t use leverage
process and at all, we keep a substantial amount of cash on hand at all times so that we can take advantage of
market anomalies that we are able to profit from. We do have 4-1 available to us on an intra day
basis but is seldom, and I repeat, seldom used.
future goals
CHW What events do you expect to see in your sector in the year ahead?
ML The rest of the year will be essentially a traders market or continuing to be a traders market
as it has been since the first part of this year. I believe we will continue to see choppiness and/or
possible continued corrections on a fairly regular basis thru the end of the 4th quarter 2010.
CHW Are investors’ expectations shifting between capital preservation and growth?
If so, how do you deal with this?
ML Some investors are looking for capital preservation but essentially the investors that come
to Olympian are seeking growth and appreciation of capital and are not really looking for us to
minimize or preserve capital as they would in balanced or fixed income portfolios.
CHW What differentiates you from other managers in your sector?
ML The defining characteristic is information and obtaining information from existing
relationships that I have on a worldwide basis in the marketplace. My adherence to risk
Michael J. Levas management and in intolerance for sloppy trading that I believe is something that differentiates me
from other managers in my style profile. And lastly, my ability to read the tape and my extensive use
CIO of options is another defining factor in separating me from the pack.
Olympian Capital Management LLC.
10 www.canadianhedgewatch.com

13. CHW How do you view the environment for fundraising in 2010? CHW Have there been any trends you are watching closely?
And does this affect your fund?
ML The regulatory landscape here in the U.S. has changed
ML There is cash available and there are investors looking to place dramatically and I believe this well have an effect on the market and
that cash. The difference is, this year, they are becoming much more due market participants in the years to come so we really need to familiarize
diligence oriented and looking for communication and transparency from ourselves with the changing dynamics in the regulatory environment both
the manager. We are continually looking for additional capital into our fund here in the U.S. and abroad.
and have been very fortunate this year with our investors and potential
investors. CHW What is in the horizon for Olympian Capital Management?
CHW How has investor tolerance for volatility and illiquidity ML Olympian’s goals and aspirations are to continue to seek out
changed in the last few years?? alpha, build our fund and separate our thinking, trading and money
management from those who seek to just merely make returns that are
ML I believe that there is a real lack of intolerance for illiquidity and
average or below average for their investors.
that is more prevalent on the investor’s minds then the volatility. As
traders, we enjoy volatility because it gives us the ability to generate alpha
Michael J. Levas, is CIO of Olympian Group of Investment Management
on both sides of the market.
Companies. Mr. Levas has been in the investment management business for
over twenty years and is the founder, chief investment officer and managing
CHW Will “green” investing continue? Expand? Accelerate? member of the Olympian Group of Investment Management Companies. Prior
ML I think that there will be a certain demand for green investing to Olympian, he was a VP and Portfolio Manager in the Private Client Group
but again that will be limited in scope to investors that are socially at Lehman Brothers Inc. Prior to that, he was a VP with SG Cowen, UBS
conscious as opposed to those that are seeking pure alpha generation PaineWebber and Bear Stearns where he managed in excess of $250 million
and growth. in both institutional and retail portfolios. Michael is the founder and managing
member of Olympian Securities LLC, and is a licensed Series 24 general
securities principal, Series 7 general securities representative, and a Series
CHW What are the key elements that you watch?
65, 66 investment adviser representative with (FINRA). Mr. Levas is also the
What shapes Olympian’s thinking and analysis right now?
founder and principal of Olympian Futures LLC, an (NFA) registered
ML Olympian’s view is more of a macro view of economic and introducing broker, and a licensed Series 3 associated person.
financial events that take place in various markets around the world.
Mr. Levas is a frequent conference speaker and commentator on the financial
Obviously since 2008, we have had a remarkable change in the financial markets and asset management industry, and has been featured in numerous
landscape and our thinking continues to be rather short to mid term in publications including BusinessWeek, Smart Money, Hedge Fund Manager
nature than more long term as some investors would like to see. And the Week, Absolute Return, Euromoney, International Securities Finance, Buy-
reason for that is that because of the increased volatility and the Side Technology, Securities Industry News, Alternative Investment Review,
additional quantitative trading that is taking place i.e. high frequency Advanced Trading, Markets Media Magazine, Waters, Bloomberg and
trading we really need to understand the impacts of these traders who are National Public Radio.(NPR)
having a substantial impact on markets worldwide.
Know your
CHAIP
C H A R TE R E D TM
A LTE R N A TI V E
alternatives.
I N VE S TM E N T
P LA N N E R TM
TM
CHAIP
CHAIPTM is a certification course for the hedge fund and alternative investment industry,
D
TE RE
CH AR
RN AT
IV E arming Canadian financial professionals – advisors, planners, compliance officers, managers
AL TE
EN T
ST M
IN VE
PL AN
NE R
TM
and analysts - with the tools they need to make informed decisions in alternative investments.
Developed in 2005, the prestigious CHAIPTM designation is earned through a programme
that focuses exclusively on Canadian hedge fund and alternative investment strategies, tax
and legal issues, with:
• Investment strategies, relevant case studies plus legal & tax content written by McMillan
• Analytics, Due Diligence and Fit of alternatives within an overall portfolio
• Peace of mind for investors through best practices, code of ethics, integrity, professionalism
and fiduciary duty
To register, call 1-416-306-0151 ext. 2226 or go to www.chaip.com
The CHAIPTM programme and CHAIPTM designation is produced by the
educational division of Canadian Hedge Watch www.canadianhedgewatch.com
Volume 10 Issue 7 - July 2010 11

14. A R O U N D T H E H E D G E - A Review of Hedge Fund Happenings
Garrison Hill & Redwood Asset Manitou Investment Management Acquires
Management to Launch Canada's First the Greenrock Global Cleantech L.P.
European Crisis Fund Manitou Investment Management announced an extremely positive
development for the Greenrock Global Cleantech L.P. Manitou has
Toronto - June 24, 2010 – Garrison Hill Capital Management along
agreed to acquire the right to manage the LP, from Greenrock Asset
with partner Redwood Asset Management, are pleased to announce the
Management, and assume its on-going control. Peter Hofstra will
launch of Canada's first fund focused on the European financial crisis.
continue as the manager of the LP, which will be renamed – the
The Garrison Hill European Crisis Fund seeks to provide investors Manitou Focus+ L.P. and maintain its commitment to delivering
with the ability to profit and hedge their portfolios from deteriorating superior results by investing in companies with a sustainable/green
political and economic conditions in the Euro Zone. focus. As well, Peter will become Manitou’s Director of Investment
Management & Research. As a benefit of working with a larger
"Economic and political issues in Europe continue to influence
organization, Manitou is reducing the management fee, of the LP, from
investment returns in other asset classes globally," said Michael Yhip,
2% to 1% effective July 1, 2010.
President and Chief Investment Officer of Garrison Hill. "We believe
these are structural issues that will take years to resolve and investors Distinct from the LP, Greenrock Asset Management (“GAM”) will
need to manage the risk to their portfolios accordingly. The European continue to operate and focus exclusively on investing in early stage
Crisis Fund provides investors a unique investment opportunity and green related companies as we did with Zenn Motors and Catch the
risk management tool." Wind. We have hired Chris Seed, an individual with investment
banking experience, to support this ongoing endeavour. We continue
The Fund will be actively managed and will use long and short strategies
to believe there is tremendous investment opportunity in this category
in a broad range of asset classes such as currencies, commodities,
and are thrilled that Peter will continue to act as a Special Advisor to
fixed income, and equities in order to achieve its investment objective.
GAM, thereby enabling us to sustain the mutually beneficial dialog that
The Garrison Hill European Crisis Fund will be available through has developed over the years.
Redwood Asset Management. Garrison Hill will act as the sole
Portfolio Advisor to the Fund. "Redwood is pleased to partner with Sprott Steps Down as Chief, Replaced
Garrison Hill as they have demonstrated the ability to understand
complicated global events and turn them into distinct investable by Grosskopf
ideas" said Peter Shippen, President of Redwood.
Date: Thursday, July 15, 2010
The Fund is currently being marketed to accredited investors only with Author: David Scanlan, Bloomberg
an anticipated launch date of July 12, 2010.
Eric Sprott, whose gold and resource-based hedge funds soared six-
fold over nine years, is stepping down as chief executive officer of
Merlin Securities Expands Footprint Sprott Inc. and will be replaced by Peter Grosskopf on Sept. 7.
to Canada Sprott, 65, becomes chairman of the company, replacing Jack Lee,
Prime brokerage firm Merlin Securities is expanding its footprint with and will be chief investment officer of Sprott Asset Management, the
a push into Canada. The firm has recently hired Daniel Dorenbush as Toronto-based firm said today in a statement. Grosskopf joins Sprott
a partner and chief executive officer of the firm’s Canadian operation, Inc.’s board and will serve as president and CEO of Sprott Resource
which is slated to open later this year, FINalternatives has learned. Lending Corp.
In his new role, Dorenbush will be based in Toronto and will report to The Toronto-based money manager’s Sprott Hedge Fund returned
Ron Suber, senior partner, head of global sales and marketing. about 496 percent in the nine years to the end of 2009 as bets on gold
Most recently, Dorenbush was a New York-based managing director stocks and oil and gas companies paid off.
and global head of strategic sales and relationship management in the
hedge fund services division at RBC Capital Markets. He had Sprott founded his current money management firm after divesting
responsibilities across electronic, professional and futures trading, Sprott Securities, now Cormark Securities Inc., to its employees.
including prime brokerage, soft dollar services, capital introduction Grosskopf is president of Cormark.
and RBC’s fund of hedge funds. Prior to that, he was global head of
prime brokerage for RBC Capital Markets. Sprott Asset Management’s senior portfolio manager Peter Hodson
will be stepping down from the board, the firm said. Lee will serve as
Merlin Securities was founded in 2004 and serves more than 500 Sprott Inc.’s lead director, the company said.
single- and multi-primed managers, providing them with an open
architecture suite of solutions including dynamic performance Sprott Inc. fell 5 cents to C$3.30 at 3:56 p.m. in trading on the Toronto
attribution analytics and reporting, seamless multi-custody services, Stock Exchange. The stock has plunged from its initial public offering
capital development, 24-hour international trading, securities lending price of C$10 in 2008.
and access to the Gerson Lehrman Group’s worldwide network of
experts. In addition to its planned Canadian office, the firm has
operations in San Francisco and New York.
>>> Around The Hedge (continued on page 14)
12 www.canadianhedgewatch.com

15. EMP
Exempt Market Products
Preparation Course
Save $400* off the combined price of
the Exempt Market Products (EMP)
Preparation Seminar and
IFSE's EMP Course & Exam
(regular combined price is $950)
If you have been selling OM products,
effective September 28, 2010, National Instrument 31-103
will affect the way you conduct business.
You must either pass IFSE’s EMP Exam or the CSI Canadian Securities Course Exam and
you must register with one single EMD firm registered in the province(s) you conduct business.
Radius Financial Education is offering a 2-day EMP Preparation Seminar,
designed to prepare agents for IFSE’s Exempt Market Products Exam.
For further information visit
radiusfinancialeducation
EMP Preparation Seminar dates & locations:
• August 9/10 (Calgary) • August 23/24 (Vancouver) • September 20/21 (Calgary) •
A PRESENTATION OF
*Some limitations may apply, please call for details.

16. >>> Around The Hedge (continued from page 12) They also need to appoint someone to be a chief compliance officer.
That could be the [chief financial officer] or internal general counsel.
Q&A: Hedge and Private Equity Funds [But if] it is a very complex organization that is not yet registered, that
may mean they need to hire someone for that role.
Under Financial Reform Law
Date: Friday, July 23, 2010 NLJ What does it mean for lawyers who advise these types of
companies?
Author: Sheri Qualters, law.com
The financial reform law signed into law by President Barack Obama TB Lawyers who represent hedge funds and private funds will have,
on July 21 targets a sector that has previously escaped vigorous at least at the outset, a significant amount of legal work to get their
government scrutiny – hedge funds and private equity funds. The clients registered. On an ongoing basis, compliance is less intensive.
Private Fund Investment Advisers Registration Act of 2010, which was Venture capital is a mystery as to how [the SEC is] going to define
enacted as part of the financial reform law (officially the Dodd-Frank that. [But] many funds don't have narrowly defined investment
Wall Street Reform and Consumer Protection Act), calls for most strategies; they have more broadly defined strategies that may enable
hedge fund and private fund advisers to register with the U.S. them to make investments the SEC may not consider venture capital
Securities and Exchange Commission. The law exempts investment investments. There may be a whole group of what we'd consider
advisers who manage only venture capital funds, but it's not clear venture capital [companies that] will be required to register. The SEC
which companies will be exempt from the rules because the SEC has seems inclined to have everyone register. They're likely to craft a
a year to define what's a venture capital fund for purposes of the law. definition that is very narrow. Law firms that do venture capital fund
formation will have many of their clients being required to register.
More onerously, companies subject to the act will be required to adopt
compliance programs, tap a chief compliance officer, craft a written NLJ Does the law contain any surprises for the industry?
code of ethics and implement policies to curb insider trading. Thomas
Beaudoin, a partner in the Boston office of Wilmer Cutler Pickering TB Let's say I'm living in Russia and investing in Russian securities. If
Hale and Dorr who chairs the firm's fund formation practice group, I have U.S. investors with $25 million, I'm going to have to register
discussed the types of companies that are subject to the law, what it unless I come under an exception. That is going to be a real surprise
means for overseas private advisers and the law's impact on to [private fund managers] who work outside the U.S. – that the reach
attorneys. The Q&A has been edited for space and clarity. of U.S. laws is pretty vast.
NLJ The hedge fund and private equity sectors have always been NLJ Will it be a challenge for the SEC to enforce that?
considered lightly regulated compared with other segments of the
financial services industry. Do you consider this the first significant TB I would think it would be. It will also be a big challenge for any non-
regulation of these sectors? U.S. based money manager subject to these requirements to register.
Thomas Beaudoin There was an attempt to regulate hedge funds by NLJ Do non-U.S. money managers who have U.S. investors typically
requiring them to register back in 2004 or so, but that ultimately failed. work with U.S. lawyers now?
This is an attempt to get hedge funds and others, including private
equity funds and non U.S. [investment advisers], to register with the TB They should be, if they're taking U.S. money, they should be.
SEC to keep a much closer eye on them. Today, they are very lightly Theoretically, they are at least interfacing with U.S. lawyers if they're
regulated entities, and soon they will be highly regulated entities. conducting any kind of sales activity in the U.S. [But] if you're talking
about someone managing $5 billion and taking in a few [U.S.] people
NLJ The act exempts several categories of advisers, including those [whose investments] add up to $30 million, there's a tendency on
who solely manage venture capital funds or private funds that have some of their parts to ignore U.S. law or not to get a U.S. lawyer
less than $150 million in assets under management in the U.S. Given involved.
the exemptions, what kind of companies is the act really targeting?
NLJ Is advising overseas fund managers a growing legal area?
TB It's really targeting hedge funds and most private equity funds. It
has that under $150 million [language] to exempt smaller buyout TB The appetite of U.S. investors for [foreign investment] products,
funds, but it's fair to say it's looking at virtually all buyout funds. whether we're talking a private equity fund that invests in Indian
companies or a venture capital fund that invests in Chinese startups,
NLJ What legal questions will these types of companies face going there's a very large appetite from U.S. investors for those kinds of
forward? products. The role of U.S. lawyers in capital formation projects
managed overseas and invested in overseas is becoming much more
TB [First], registering under the act. It's not a difficult process, but it's prominent than it was, say, 15 years ago.
a process nonetheless. Also, developing rules and procedures around
different aspects of your operations. [Companies now] might not have
as robust a code of ethics or document-retention, conflicts-of-interest
or insider-trading policy as will be required.
14 www.canadianhedgewatch.com

17. EXCHANGE
TRADED
FORUM2010
Don’t miss the ETF's
ETF event ETN's
of the year! Indexing
October 25th & 26th, 2010 Structured Products
Toronto Board of Trade - Downtown Centre
Closed End Funds
Special Keynote Speaker
Harry Markopolos “The Madoff Whistleblower”
Radius Financial Education is pleased to present Madoff whistleblower
Harry Markopolos, author of No One Would Listen, the fascinating true
story of how his team’s investigation uncovered a $65 Billion Ponzi scheme,
A PRESENTATION OF SPONSORED BY
radiusfinancialeducation.com

18. HIGHWATER DIVERSIFIED OPPORTUNITIES FUND
HIGHWATER DIVERSIFIED TRUST FUND
FUND DETAILS PORTFOLIO MANAGER
Fund Type Diversified North American Active Value Ara Nalbandian, Portfolio Manager, CFA FCSI DMS
Ara Nalbandian specializes in absolute return strategies investing in North American securities. He started his career
at Richardson Greenshields / RBC Dominion Securities in 1996 and later joined BMO Nesbitt Burns in 1998. He was
Auditor KPMG LLP
awarded the Chartered Financial Analyst designation in 2000 and Derivatives Market Specialist designation in 2002.
Legal Counsel Borden Ladner Gervais LLP
He was most recently Senior Portfolio Manager at Sentry Select Capital Corp. where he achieved tremendous success
Fund Accountant SGGG Fund Services Inc. between 2000 and 2007. Since December 2007, he has been the Portfolio Manager of the HIGHWATER Diversified
Prime Broker / Custodian CIBC World Markets Inc. Opportunities Fund.
Globefund 5 Star Rating
HIGHWATER DIVERSIFIED OPPORTUNITIES FUND LP INVESTMENT OBJECTIVE AND STRATEGY
Fund Code Class A HCM 100 The fund's objective is to achieve consistent absolute returns throughout various market conditions by investing
Fund Code Class F HCM 110 primarily in the equity securities of mid and large capitalization entities listed on major securities exchanges in Canada
December 2007 and the United States. The Manager seeks to maintain a moderate level of risk and reduce the volatility of returns by
Launch Date
diversifying its investments by sector, asset class, strategy and other identified sources of risk and by employing
Structure Limited Partnership
options strategies, short positions, arbitrage strategies and seeking special situations with attractive expected risk
Valuation Monthly
adjusted return parameters. The Manager will employ a disciplined, fundamental, value biased securities selection
Liquidity Monthly (10 days notice) approach with an emphasis on generating consistent portfolio income through varying sources including dividends,
Minimum initial investment $25,000 accredited investors income generating option strategies and active portfolio management. A priority is placed on capital preservation
$150,000 non-accredited investors engaging in tactical asset allocation and hedging strategies.
Minimum investment term 6 months (2% short-term trading fee)
Management fee Class A 1% COMPOUNDED RETURNS (CLASS F) as at June 30, 2010
Management fee Class F 0% fee based accounts only YTD 3 month 6 month 1 year 2 year 3 year Inception
Performance fee 15% 3.2% -3.0% 3.2% 19.3% 9.7% - 6.0%
High water mark Yes CALENDAR AND MONTHLY RETURNS (CLASS F) as at June 30, 2010
Front End up to 3% Year Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Registered Plans No 2010 3.2% 0.7% 2.8% 2.7% -1.0% -2.1% 0.1%
2009 50.3% 3.2% -3.7% 6.7% 8.2% 9.3% 3.5% 1.7% 3.2% 1.7% 0.7% 4.1% 3.4%
2008 -25.4% 0.5% -0.2% -0.4% 1.0% 1.8% -6.3% -2.3% 4.4% -7.4% -9.6% -11.3% 2.5%
HIGHWATER DIVERSIFIED TRUST FUND VALUE OF $100,000 INVESTED
$120,000
Fund Code Series A HCM 200
Fund Code Series F HCM 210
$110,000
Launch Date December 2009
Structure Trust $100,000
Valuation Monthly
Liquidity Monthly (10 days notice) $90,000
Minimum initial investment $1,000 accredited investors
$150,000 non-accredited investors $80,000
Minimum investment term 6 months (2% short-term trading fee)
Management fee Series A 1.5% $70,000
Management fee Series F 0.5% fee based accounts only
Performance fee 15% $60,000
High water mark Yes Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10
Front End up to 3% Highwater Diversified Opportunities Fund (Class F)
Registered Plans Yes (RRSP Eligible) S&P/TSX Composite Total Return Index
S&P 500 Total Return Index (C$)
TOP 5 HOLDINGS* GENERAL ALLOCATION
25% Long Short
IBM Portfolio Yield 3.9%
Long (long call option) Short (long put option)
Becton, Dickinson & Co Net Long Exposure 104.0% 20%
Cogeco Inc. (including: exposure through options, 15%
Telus Corp. bonds, preferred shares and ETFs)
10%
Atrium Innovations Inc.
*(excluding Diversified) 5%
0%
FOR MORE INFORMATION CONTACT:
-5%
Financial
Technology
Diversified*
Materials
Consumer
Consumer
Energy
Health
Preferred
Telecom
Services
Estate
Bonds &
Care
Real
Shares
Cyclical
Staples
Highwater Capital Management Corp. -10%
Telephone 905.265.0649 -15%
Fax 905.265.0646
-20%
e-mail info@highwatercapital.com
Website www.highwaterfunds.com *Diversified: Closed-End Arbitrage, ETF & Index
Performance figures based on investment since inception December 2007 in Class F units net of all fees and expenses.
Information contained in this document pertaining to the Highwater Funds is not to be construed as a public offering. The offering of units of each of the
Funds is made pursuant to its respective Offering Memorandum only to those investors in jurisdictions of Canada who meet certain eligibility and/or
minimum purchase requirements. Important information about each of the Funds is contained in their respective Offering Memoranda. Eligible investors
should read the Offering Memoranda carefully before investing. Performance data represents past performance and is not indicative of future performance.
Please contact your investment advisor to determine suitability of investment.
20 www.canadianhedgewatch.com

19. HIGHWATER DIVERSIFIED OPPORTUNITIES FUND
HIGHWATER DIVERSIFIED TRUST FUND
FUND COMMENTARY
The Highwater Diversified Opportunities Fund was essentially flat for the month up 0.1% while our benchmark index was down 4.2%.
Our benchmark is comprised of the S&P/TSX Total Return Index and the S&P 500 Total Return Index of which half is currency hedged
toward the Canadian dollar.
Since inception the fund has outperformed its benchmark by over 33% and year-to-date the fund has produced positive returns of
3.2% while the benchmark lost 4.2% during the same period.
STRATEGY SNAPSHOT
Since the end of the first quarter, we had been increasingly defensive throughout the recent equity market rally, gradually reducing
positions as they exceeded our valuation targets, adding to fixed income positions and hedging portfolio exposure.
More recently though, we are seeing attractive opportunities to accumulate positions focusing on large cap, high quality, free cash flow
generating, dividend paying companies with strong balance sheet characteristics.
OPTION MARKET REVIEW
Our hedging strategy was predominantly executed by accumulating laddered positions in index put options during the recent
overbought market conditions at relatively low index implied volatility levels (inexpensive portfolio insurance). We have since reduced
our hedging by approximately half during recent periods of market decline and elevated index implied volatility levels.
This environment has presented opportunities to accumulate equities at a reasonable discount to our estimated intrinsic value targets.
One of the ways we have initiated positions is by increasing our option writing activity as premiums are elevated on individual securities.
This process effectively reduces our purchase price.
FIXED INCOME REVIEW
Recently, the yield curve on the long-end has experienced a significant flattening resulting in the 10-year U.S. Treasury yield dropping
from 4% to 3%, and the 2-year U.S. treasury reaching a record low of 0.59%. During this period we have been taking advantage of
wider credit spreads strategically adding to our fixed income positions that continue to exhibit an improving credit story.
OUTLOOK
Our strategies remain consistent with our thesis that equity markets are attractively valued, yet likely to remain range bound in the
near term within a wide trading band. We are seeing increasingly attractive valuations in the large cap tech sector with multinational
technology companies trading at about 13 times forward earnings. We continue to be very selective in our approach strategically
adding positions in companies that demonstrate compelling operating metrics, proven management strategy and shareholder-friendly
behaviour. Consequently, we expect the combination of dividends, income generating option strategies and disciplined active
management will produce attractive returns in our portfolio over the balance of the year. Highwater Capital Management’s disciplined
approach has resulted in a significant outperformance of equity benchmarks since inception in December 2007 on an absolute and risk
adjusted return basis.
ABOUT HIGHWATER
Highwater Capital Management is a performance-driven asset management firm specializing in disciplined strategies for diversified
income. Founded in 2007, our mission is to achieve consistent absolute returns throughout various market conditions by investing
primarily in mid and large capitalization North American equity securities while maintaining a moderate level of risk using option
strategies to maximize income in our portfolios.
Volume 10 Issue 7 - July 2010 21