Looking at liquid alts' downturn performance

Alternative mutual-fund index shows good relative returns, providing early vindication for proponents

Looking at liquid alts' downturn performance

Canada’s liquid-alternatives space has just 15 months of history behind it, but its defensive capabilities are already being tested — and the Scotia Alternative Mutual Fund Index suggests that they’ve done fairly well so far.

For the first three months of the year, the equal-weighted index of 40 Canadian liquid alternative funds registered a negative return of 8.69%. In comparison, Morningstar data shows that the S&P TSX composite was down by 20.9% over the same period, while the S&P 500 declined by 12.19% in Canadian dollar terms.

Canada’s liquid alternative funds universe now encompasses an estimated 110 funds, according to Morningstar, with $8 billion in assets as of January 2020. The Alternative Investment Management Association (AIMA) sees that number growing to at least $25 billion in five years.

Looking at more granular data furnished by Fundata, Morningstar found that eight out of 39 funds have managed to produce positive returns. That includes the Desjardins Alt Long/Short Equity Market Neutral ETF, which managed to eke out a 1.76% return over the first quarter, and the WaveFront Global Diversified Investment Class fund, a $12-million fund whose year-to-date returns clocked in at 26.17%.

“The fund invests close to 30% of its $12 million portfolio in the agriculture sector with holdings like Cotton No. 2, another 24% in Bonds, and close to 20% in currencies like the Australian dollar,” Morningstar said.

The results provide early vindication for AIMA Canada, which has maintained that alternatives deserve more prominent standing in Canadian portfolios. Investment managers will also likely focus more attention on them by either enhancing their current menus of liquid-alt products or making inroads into the category with initial offerings.

That’s not to say it’s all good for all Canadian alternative mutual funds. As noted by Morningstar, some have suffered falls as deep as 37% into negative territory. And the short history of many liquid alts, with many having yet to celebrate their first birthday, may be cause for hesitation.

But given the recent pain inflicted by the coronavirus on financial markets, investors will likely be far less apprehensive about diversifying their portfolios with non-traditional assets and strategies.


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