Alternative investment strategies are poised to take off in Canada this year, as proposed changes to the investment fund regulatory framework enabling broader access to these strategies are expected to be implemented in the coming months, according to alternative investment experts who spoke at the Canadian Funds Summit in Toronto on Tuesday.
Proposed amendments to National Instrument 81-102 – Investment Funds, which the Canadian Securities Administrators (CSA) published in 2016, are expected to be adopted this year, according to Claire Van Wyk-Allan, director and head of Canada at the Alternative Investment Management Association (AIMA) in Toronto.
The proposed changes would create a new category of prospectus-offered investment funds, called “alternative funds,” which would be able to use investment strategies that are not permitted to be used by conventional mutual funds.
The changes would bring “a new wave of alternative products to a wider audience than ever before,” said Van Wyk-Allan. “All investors in Canada will be able to access the diversification, risk-reduction, and non-correlated returns that alternative investments provide.”
The regulatory change would provide advisors with a hefty new category of products to offer clients, she added: “Advisors would have greater access to products that can help demonstrate their value to clients.”
However, the new asset class would also have other implications for advisors, including new asset-allocation guidelines, changes to risk ratings, new product education requirements and enhanced regulatory oversight, Van Wyk-Allan said.
Under the current regime, many alternative strategies are only available through private pooled funds offered under offering memorandums (OMs) to accredited investors and other exempt clients. Selling such products requires a lot of paperwork and. as a result, many advisors steer clear of alternative strategies, according to Jesse Kaufman, vice president and portfolio manager with Toronto-based Richardson GMP Ltd.
“[If] advisors were able to [help their clients] invest in alternatives the way they can invest in just about everything else, the uptake would be higher and the interest would be higher,” said Kaufman. “The ability to access alternative strategies without some of the barriers that have existed historically is something that should serve many advisors and their clients well.”
Toronto-based Horizons ETFs Management (Canada) Inc. has been offering ETFs that employ alternative investment strategies for several years now, since that company was granted exemptive relief from the relevant regulation, according to Steven Hawkins, president and co-CEO of Horizons. Toronto-based Mackenzie Financial Corp. also recently launched a mutual fund, Mackenzie Multi-Strategy Absolute Return Fund, under that company’s own exemption.
“My problem is, now this is going to open up competition for those types of strategies for everybody else,” Hawkins said.
Once the new framework is introduced, Hawkins said he expects to see many new ETFs emerge that provide investors with access to investment strategies that have been reserved traditionally for OM offerings.
“There will be more and more players that will come into the ETF world looking at alternative-type strategies,” Hawkins said.
Vancouver-based robo-advisor firm WealthBar Financial Services Inc. might consider adding alternative investment options to its offerings when the new rules take effect, according to Neville Joanes, chief investment officer and chief compliance officer at WealthBar. However, he said that when it comes to alternative strategies, which can be complex, it’s critical to ensure clients understand the strategies.
“Putting a hedge fund-style product into a diversified portfolio does make sense, provided it’s reducing risk,” Joanes said. “But, we also need to explain it to our clients. Clients need to understand what they’re investing in.”