AlphaNorth Asset Management runs a Canadian  small-cap, long-biased hedge fund that tries to maximize the risk-reward ratio on its investments.

How? 

“We evaluate all the investments in the portfolio every week and if something comes along that offers more attractive upside versus the downside risk, we’ll swap it out,” said AlphaNorth President and Chief Executive Steven Palmer.

The fund – called AlphaNorth Partners Fund – offers tax-deferred investment returns, thanks to a forward agreement with TD Global Finance, part of Toronto-Dominion Bank (TD), meaning unitholders pay no tax until unit redemption. 

The fund tends to focus on companies with a market capitalization of less than C$100 million.  “Banks’ small-cap funds usually have a cut-off of around C$100 million so 
they’re not looking at the companies we’re looking at; there are a lot of  opportunities to get involved prior to the company going mainstream,” he said. 

Aeromechanical Services, Puget, Colossus Stand Out. The fund is diversified, less than C$50 million in size and comprises some 50 names. Roughly half the fund revolves around resource-based stocks, with the rest a mixture of technology, biotech and special situations, the latter  being companies that are, say, sitting on a unique or niche product.

Palmer likes Aeromechanical Services Ltd. (AMA.V), which provides real-time data communications for the aerospace industry by using the Iridium satellite network.  It has also recently launched a fuel-management program to help airlines  optimize fuel consumption.

“They just turned cash-flow positive in the last quarter, which is a good milestone,” Palmer said. “They’re getting traction in the market and bidding on a lot of new business.” 

Puget Ventures Inc. (PVS.V), an early-stage cobalt company, is in the portfolio, in part because AlphaNorth has been watching how electric-car initiatives have ramped up demand for viable electric batteries.  While this has pushed valuations for lithium-based companies higher, Palmer  said the market hasn’t fully realized that three times as much cobalt as lithium is used in electric batteries.

“(Puget) is much closer to production than some lithium companies; the property produced cobalt in the 1940s,” Palmer said. “It has a unique deposit; it would be the only primary cobalt operation in Canada.”

And then there’s Colossus Minerals Inc. (CSI.T), an exploration company focused on developing Brazilian gold deposits.  “They’ve had some phenomenal results on the property, some of the best drill results I’ve ever seen in terms of value,” Palmer said. “They will continue to put out good results and the company will eventually be taken over.”

Company Web site: http://www.alphanorthasset.com 

-Brian Truscott, Dow Jones Newswires; 604-669-1595; 

brian.truscott@dowjones.com