Portfolios don’t have enough defence, says AIMA

The doors are open for a sea change in alternative investments but association warns there is still work to be done

Portfolios don’t have enough defence, says AIMA

If investment portfolios are like hockey teams, then Canadian investors don’t have enough defensive players or goalies on their bench.

That’s the overarching argument put forth by the Alternative Investment Management Association of Canada (AIMA Canada) in the recently released AIMA Canada Handbook 2019: A Report on the Canadian Alternative Investment Landscape.

“Similar to a team, an investment portfolio requires that you balance who is playing offence (getting returns) versus defence (protecting on the downside),” reads an infographic featured in the document. “Most hedge funds act like your defence or goalie. They can still score goals, but are mostly working to protect the downside.”

Hedge funds, along with investments in alternative asset classes, have been shown to provide better insulation than equities and bonds in times of severe market volatility. And with broad adoption among institutional investors including pension funds, endowment plans, and sovereign wealth funds, the tried-and-tested strategies certainly deserve to be considered for inclusion within retail portfolios.

The doors have been open for some time, thanks to amendments to NI 81-102 that took effect in January this year which allowed the distribution of liquid alternative funds. “There’s been a lot of excitement in the Canadian investment industry broadly,” said Claire Van Wyk-Allan, head of AIMA Canada, told WP.

Figures and statistics vary among different sources, but Van Wyk Allen said that total AUM has cleared $4.5 billion across more than 60 funds, including liquid-alt ETFs. That has come amid a gradual convergence of two segments of asset management in Canada.

“We’ve seen new entrants into the alternative investment industry with traditional asset managers launching alternative products for the very first time,” Van Wyk-Allan said. “And we’ve also seen boutique and hedge fund managers offering their proven strategies in a prospectus-based format.”

In many cases, it’s not a matter of a firm going it alone in the new space. A traditional shop may enter into a sub-advisory relationship with a hedge firm. Some alternative mutual funds have also been enabled by consolidation, which can be expected to continue as the industry moves forward.

The role of securities regulators and self-regulatory organizations mustn’t be overlooked either. “I compliment the regulators on being incredibly flexible,” Van Wyk-Allan said. Aside from paving clearly defined regulatory roads for participants on matters like exemptive relief and rehypothecations, the CSA has also set boundaries for the operations of multiple custodians, long-short credit strategies, and market-neutral funds. Exemptive relief is also being extended to allow for flexibility in terms of leverage and shorting.

Still, obstacles remain. For some asset managers, accessing the IIROC channel has been challenging, particularly as risk ratings for traditional mutual funds may not reflect the true risk represented by alternative investments. One effort to address that has come from alternative risk rating guidelines proposed by AIMA Canada and the Chartered Alternative Investment Association (CAIA).

“I’ve been pleased to see that collaboration with IIROC dealer head offices working to understand these strategies and being very open-minded about flexibility in risk ratings,” Van Wyk-Allan said.

She also estimates that between 300 to 500 IIROC advisors have a thorough understanding of alternative investments and use them meaningfully in portfolios. But that’s barely a dent in the total market of approximately 10,000 retail advisors in Canada. “AIMA’s been tackling that by providing more education through CE courses available online,” she said.

And at the moment, only IIROC advisors are currently allowed to purchase alternative mutual funds. To open a path for MFDA advisors, AIMA has been working with other associations to develop proficiency requirement proposals for MFDA members, which are expected to be ready for publication in a few weeks. That’s aside from their ongoing collaborations with regulators and other bodies across Canada, as well as their efforts to engage their membership.

“The alternative investment landscape is made up of a community, and it’s important to hear all voices within that community so we can focus on key areas to drive the industry forward,” Van Wyk-Allan said.


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