After the CSA propsed that prospectus mutual funds should be allowed to use hedge fund strategies and tactics, we asked Chief investment Solutions Officer at Fiera Capital, Francois Bourdon, about his opinion on the move and how it may affect the Canadian investment landscape.
“I hope it happens,” Bourdon says. “In the current investment environment, investors need as wide a tool kit as possible, and having the ability to be more flexible in the design of investment strategies is one positive element that I would like to see.”
If ratified, the proposal will give mutual fund investors the ability to sell short, which, in the current low interest rate environment, is very attractive. It will also enable investors to use leverage in the search for better returns. “In the current environment, relative trades make sense, so an investor may want to be invested in the Canadian 10 year bond and short the US 10 year bond,” Bourdon says. “Without leverage, that move would not provide a great return. Leveraging would get a greater return (if you are right) and the volatility is not greater than if you were just buying the 10 year bond.”
“Allowing for leveraging and shorting is going to be helpful for investment managers, who will have more tools in their tool kit. It’s not the end-all solution, but it’s a good step.”
Bourdon believes that the potential new offerings would be an important addition to the Canadian investment landscape. “A big portion of hedge funds’ return driver is talent, so adding this new element to portfolio construction is going to be helpful,” he says. “I wish they would go further and allow for more of the less liquid assets, like infrastructure, real estate, agriculture, and lending. But as a first step, this is a positive thing.”
Bourdon thinks that regular mutual funds will remain the key play on the Canadian investment landscape, and that the new hedge fund-like products will provide investors with greater diversification in their search for returns. “It won’t revolutionize the way investors are operating but it’s nice to have more flexibility,” he says.
Advisors are under pressure to help their clients diversify away from interest rate risk, which could create serious investor problems if rates were to be raised by 1%. “At the same time, we’re moving ahead in the economic and investment cycle,” Bourdon says. “Generally, stocks have gone up since 2008 and, at some point, there will be another recession and bear market. When that happens you don’t want to be fully exposed to rates or equities, so you need to be considering strategies to diversify.”
In the US and Europe, the liquid alt strategies that have come to market have had high correlation with the stock markets (around 80%). “I hope in Canada we will get investments that are not fully correlated to the stock market,” Bourdon says. “If you’re brining in new regulations that are more permissive, but they only provide stock market returns that are levered, that’s nothing new for the investor.”
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