A small hedge fund betting on a Canadian housing market crisis had a double-digit loss last year as property prices held up and bank shares rebounded on optimism about a soft landing for the economy.

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Spartan Fund Management’s Libertas Real Asset Opportunities Fund lost about 14 per cent for the year, according to estimates from the fund’s manager seen by Bloomberg. It had been poised for a positive year until its United States-dollar denominated units tumbled 11 per cent in November and 13 per cent in December.

Launched in 2014, the Libertas fund’s investment thesis is straightforward: “Canada is in the midst of a credit bubble, with one of the most overvalued housing markets in the world and an economy that is over-reliant on debt and housing,” it says on its website.

So far, that bet hasn’t paid off.

Last year marked the fifth time the fund posted a double-digit annual loss, and overall it’s down about 80 per cent since its inception. Canada’s housing prices have ballooned in the past two decades, spurring speculation of an implosion that would cause a recession.

While Canadian home prices declined in 2022, they stabilized last year — buoyed by a wave of immigration and a strong job market for most of the year. The benchmark home price in November was $735,500, which was 0.7 per cent higher than a year earlier and up 37 per cent from five years ago.

Spartan didn’t respond to request for comment.

The Libertas fund’s literature makes it clear the fund is intended to help Canadian investors hedge their exposure to what it calls a “Canadian credit bubble.” The investment vehicle focuses on short bets but discloses little about its specific positions, other than to say it chooses investments that “will benefit from a decline in the Canadian economy.”

In every month last year, the fund gained when the S&P/TSX composite financials total return index dropped, and vice versa. The index finished the year up about 14 per cent.

Mortgage default rates remain low, with just 0.16 per cent of mortgages in arrears as of the end of September, according to data from the Canadian Bankers Association.

Canadian lenders and homeowners may still face difficulties.

The country’s biggest banks, which dominate residential mortgage lending, have begun to set aside larger provisions for loan losses in anticipation of an economic slowdown. That contributed to poor earnings results, weighing on bank shares for much of 2023.

About 45 per cent of Canadian mortgages taken out before the Bank of Canada started raising interest rates in March 2022 have seen an increase in payments, according to central bank research. Almost all of the rest will see their payments rise between now and the end of 2026.

“As long as they continue to experience income growth, most mortgage borrowers will not face severe financial stress from the increase in mortgage payments over the coming years,” said the Bank of Canada paper, released in December. “However, borrowers who stretched to enter the market or who were anticipating rate decreases by the time of renewal may find the adjustment more difficult.”

—With assistance from Erik Hertzberg.

Bloomberg.com