TORONTO, Ontario (HedgeWorld.com)–Sprott Asset Management Inc. this summer closed one of its hedge funds while opening another, and in a recent report to investors expressed its glum outlook about the near to midterm future of the global economy.

Canadian-owned Sprott closed the Sprott Hedge Fund LP I to all investors on July 31, and launched the Sprott Hedge Fund LP II on Aug. 31. The new fund, like its predecessor, uses a long/short equity strategy, supplemented by arbitrage strategies, corporate-event opportunities, and the participation in some select private placements.

Sprott’s report reiterated its belief that ongoing drops in equity values are “world changing events,” heading the world toward a “Kondratieff Winter.” The company’s guiding thesis is that the underlying economy and the financial markets have an ambiguous relationship, sometimes reinforcing one another but at other times moving in opposite directions and compensating for one another.

“Like the grim reaper telling you your time is come,” Principal Eric Sprott, in collaboration with research analyst Sasha Solunac, wrote in its report to investors, “the pillaging that is taking place in financial markets can lead to a death spiral where both the economy and the markets chase each other down.”

Corporations facing higher insurance costs are also facing rising pension deficits for their pension plans. Rising pension deficits must lead to increases in contributions, and those higher contributions, too, will mean less money going into production.

Messrs. Sprott and Solunac are also concerned by the scale of the litigation now unleashed at the expense of the investment banking industry as a result of the bursting of the dotcom and telecomm bubble. “The potential legal liability being bandied about…for Citigroup alone is [US] $10 billion! Many large banks are leveraged up to 20 to 1.” In the case of Citigroup, that level of leverage would mean that a liability of US$10 billion would lead to a US$200 billion contraction in the loan book.

Finally, the report’s authors contend that recent equity issues have too often been about propping up the issuer’s balance sheet, not financing production. “All of these issuances have been highly diluted and none of the money will be used to invest in the economy. Coming to a theatre near you, expect to see more of these type of stock issues–money raised to shore up pension plans, pay litigation costs, mitigate capital deficiencies, even avert outright bankruptcy. These are not the kinds of things you should be putting your savings into, it gives ‘investing’ a bad name.”

Sprott manages C$1 billion (US$628 million) in mutual funds managed accounts and hedge funds.