Liquid alternative funds have had ample opportunity to prove their mettle through this year’s market volatility. After a good showing, more launches are likely on the way.
“We would expect more volatility in the market as we continue through the pandemic and eventually look to recovery,” says Claire Van Wyk-Allan, director and head for Canada with the Alternative Investment Management Association (AIMA). “I have no doubt that we are going to see many more products launched in this space.”
When the S&P/TSX composite index plunged by 17.74% in March, the Scotiabank Alternative Mutual Fund index fell by only 6.61%. As of Oct. 31, the S&P/TSX had a year-to-date return of –8.69% compared with –0.12% for the Scotiabank index.
“[Liquid alt] products have, overall, passed the litmus test of providing downside protection, diversification and non-correlated returns through the market volatility that we saw in March,” Van Wyk-Allan says.
There were 110 liquid alt products from 38 issuers as of Sept. 30, according to the Canadian Association of Alternative Strategies & Assets (CAASA), covering strategies as diverse as credit, market-neutral and inverse/leveraged.
With so many options, AIMA believes there are plenty of opportunities for new products. In addition to different investment strategies, for example, there’s room for products covering specific sectors and regions. Future products also are likely to focus on preserving capital and enhancing yield, given the current low interest rate environment.
“There really is a broad universe of strategies across a spectrum of risk/return profiles with unique characteristics and exposure to different asset classes,” says Belle Kaura, chair of AIMA Canada and chief compliance officer with Toronto-based Third Eye Capital Management Inc.
Toronto-based Fidelity Investments Canada ULC launched its first liquid alt funds in October: the Fidelity Global Value Long/Short Fund; the Fidelity Market Neutral Alternative Fund; and the Fidelity Long/Short Alternative Fund.
The global fund invests primarily in long/short positions in equities from around the world. The fund may use leverage by short-selling up to 50% of its net asset value and through investments in derivatives.
The market-neutral fund invests primarily in long and short positions in equities in Canada and the U.S. The fund seeks returns with low correlation to major equities markets and may use leverage by short-selling up to 100% of net asset value and by investing in derivatives.
The long/short fund also invests primarily in long and short positions in equities in Canada and the U.S. Like the global fund, this fund may use leverage by short-selling up to 50% of its net asset value, although the proportion tends to be around 30%. The fund also may invest in derivatives.
In a 2018 white paper, Bank of Nova Scotia predicted that liquid alts could reach more than $20 billion in assets under management (AUM) within five years after the launch of the asset class in 2019 — a goal AIMA believes is well within reach, given financial advisors’ growing interest in these products. According to CAASA, liquid alt AUM was $11.2 billion as of Sept. 30.
As well, Van Wyk-Allan anticipates mutual fund-registered advisors will gain access to these products soon. (Currently, mutual fund advisors do not meet the required proficiency standards.)
In January, AIMA recommended a new proficiency standard for mutual fund–registered advisors. Van Wyk-Allan says she expects the issue will be resolved with the Canadian Securities Administrators soon. “That will increase distribution for this market,” she says.