Hedge funds

OSC partly to blame for Traynor Ridge debacle

The OSC pretends it knows who has the skill to manage money.
OPM 3 min read

The media is quick to sensationalize enforcement actions taken by securities regulators, as though they are some infallible arbiter of morality. But they almost never apportion blame for the regulator's role as the licensing gatekeeper of the money management business when a licensee screws up. In Traynor Ridge's case, the OSC deemed Chris Callahan fit to run a hedge fund employing complex strategies and leverage all by himself, after he had spent all of 17 months licensed in a trigger-pulling capacity. The technical term for that license is "advising representative", essentially meaning portfolio manager. Chris's employer at the time was HGC. The main trigger-puller at HGC is Sean Kallir (and currently, he's the only one with that license.) A person could have a license to drive, but only use it to go to the grocery once a week, never getting on the highway. Indeed, HGC's President Brett Lindros (of the Lindros hockey dynasty) was quick to say that Chris "spent much of his time at HGC working as an analyst".

The OSC, in greenlighting the launch of a firm like Traynor Ridge, had the duty to make sure that the people and operations were fit and proper. The OSC goes through a rigamarole of requesting a business plan for these purposes. It should have been obvious on any such plan that Traynor Ridge was going to use a prime broker. The key features of a prime broker are that they give you:

1) higher leverage than otherwise allowed by regulations

2) direct market access

3) the ability to trade away

Rumour is that CIBC gave Traynor Ridge 5x leverage. That's less than during the glory days of Lehman Brothers, but still a lot. The "trade away" feature means that Traynor Ridge could have most any broker on the street execute its trades, while keeping its cash with a single custodian. Such executing brokers are blind to your cash position and rely on your ability to settle the trade on the third day. One brokerage that incurred losses has been identified as Virtu Financial, a sophisticated global market maker. You probably don't need Virtu to buy Bell Canada shares. Miles Nadal's Echelon Wealth is another victim.

It would be one thing if Traynor Ridge was proposing to run passive investment strategies using ETFs. But Traynor Ridge wanted to run "low volatility" high "risk-adjusted performance" strategies. These imply heavy use of shorting, which is inherently dangerous as per the GameStop episode. The overall activities of an arbitrageur, as Traynor Ridge was, have been described as "picking up pennies in front of a steamroller."

As a practical matter, the frontline OSC personnel in charge of assessing and interacting with prospective portfolio managers are "paralegal" types, who are mostly clueless about the nuances of the craft. Like Meghan Markle before she went to Columbia Law School. Even if your candidacy is assessed by the Supreme Pontiff of Registration, they would still be a lawyer type. Currently, the Queen of Registration is one Toledo Debra, with a law degree from the University of Toledo's College of Law. Come on, even Meghan Markle made it to the Ivy League. How are such people possibly qualified to assess the capabilities of money managers?

Once they get the license, registrants often trade on the imprimatur of the regulator. Take a look at how Traynor Ridge described itself:

One of the very basic flaws of the registration system is that the "advising representative" designation is essentially a license to be a "Master of the Universe". On the strength of Chris Callahan's 17 months of possibly being a secondary decision-maker on a specialized arbitrage fund, the OSC allows him to direct the investment of anyone, including widows and orphans, into any security around the world, long or short. (Leaving aside derivatives). In contrast, transportation authorities are smart enough to realize that driving a car is different from driving an 18-wheeler.

I, of course, don't advocate for more regulation. I believe the marketplace should regulate these matters, particularly for high net worth investors. If Westcourt wants to risk its wealthy clients' money with an unproven manager, it's their right. I am not the only one criticizing the OSC's phoney-baloney licensing system. Leading financial expert Dan Hallett has said: "The OSC are a bunch of clowns who are in way over their heads." Wow! That goes a lot farther than I would have! I am sorry, I made up that quote, I just wanted to feel like a bona fide financial reporter for once, like Clare O'Hara. Something like 90% of her articles have a quote by "leading financial expert" Dan Hallett. If Dan Hallett is not a real person, it would be one of the biggest scandals in journalism.

Speaking of the unerring wisdom of the private marketplace, it turns out there's another strong Westcourt connection to Traynor Ridge. The hedge fund's biz dev guy William Chyz had previously spent 9 years at Westcourt Capital. Rumours say Westcourt may have even seeded Traynor Ridge.

More from OPM WIRE

You can still sign up for free!

We still offer a free subscription tier (aka Blind Squirrels).

Great! You’ve successfully signed up.

Welcome back! You've successfully signed in.

You've successfully subscribed to OPM WIRE.

Success! Check your email for magic link to sign-in.

Success! Your billing info has been updated.

Your billing was not updated.