Leaders from AIMA Canada lay out the strengthening case for long-short strategies, CTAs, private credit and other alternative assets
Belle Kaura has been seeing a significant movement of capital away from public markets – and given what’s been happening in both fixed income and equities, it’s easy to see why.
“We are entering a new era of higher rates for longer,” Kaura, the chair of the Alternative Investment Management Association Canada (pictured above, right), told Wealth Professional in a recent interview. “With bonds trading off as rates rise and equity market volatility tied to fiscal policy and inflation, alternatives should be a core component of all investment portfolios today more than ever.”
As Canadians in the retail space face low pension coverage, Kaura says advisors are looking for ways to generate better risk-adjusted returns. The growing challenges in fixed income and equities, she says, creates a need to redesign portfolios for more tactical asset allocations to alternatives and private markets.
“Private markets can provide unique return streams, potentially higher returns than public markets, inflation protection and diversification,” Kaura notes. “Long-short strategies employ tools like short selling and derivatives to provide a more consistent return profile independent of the direction of equity markets and interest rates. Long-short equity strategies provide benefits of equity ownership and also have the potential to deliver attractive yields with increased downside protection.”
Kaura says anti-beta strategies, which use long and short equity positions, can likewise act as a strategic buffer against impacts of volatility and drawdowns. Rate-neutral long-short credit strategies, she adds, could offer diversification returns and an investment grade safe haven from interest rate risks associated with traditional fixed income while limiting exposure to duration risk and losses from increasing yields.
“Liquid-alt fund structures have allowed for greater democratization and adoption of alternative investment strategies by wealth advisors in Canada,” says Claire Van Wyk-Allan, managing director and head of Canada at AIMA (above, left). “Canadian research shows the fund flows have been predominantly [toward] alternative equity strategies, followed by credit long-short strategies, and then followed by multi-strategy funds.”
Another trend this year, according to Kaura, has been the resurgence of CTAs. “The space is experiencing renewed popularity as the deepening economic and market crises has created an opening for CTAs to be used as potential portfolio insurance-like strategy or for crisis alpha.”
“Many panelists at our recent global investor forum cited the benefits of not only long-short equity and private strategies, but also strategies like global macro … managed futures, CTAs and trend-following strategies,” says Van Wyk-Allan.
While no alternative asset class can provide a perfect inflation hedge, Kaura says infrastructure has been gaining attention for its ability to protect cash flows through inflation-indexed pricing models and exposure to essential areas of capital spending, including nascent segments like clean energy and data infrastructure.
The growth in renewable energy and technology, Kaura says, could also have a positive knock-on impact on natural resources and commodities. Unlike many other asset classes that are expected to decelerate, she says large swaths of the real estate space are poised for AUM growth in the coming years, while private equity is expected to grow at its highest rate, with a projected rise to53% as a proportion of all alternative - assets globally by 2025.
“Private credit, which acts as an inflation hedge with loans that are generally linked to floating rates … also offers the potential for capital preservation through collateral on assets,” Kaura adds. “Private debt has the ability to withstand downturns, deliver solid performance, and pump needed liquidity into the economy by supporting businesses across different sectors in need of capital to grow and survive.”
“Private credit has been cited multiple times in our investor studies this past year as a key area they are planning to allocate to,” says Van Wyk-Allan.
“The impact of market volatility and the denominator effect on capital raising is expected to be temporary. With further interest rate hikes potentially on the horizon, traditional fixed income monies could shift to private debt. Market conditions are compelling for opportunistic special situations and private debt investments, with increased deal flow and a prolonged default cycle expected,” Kaura says. “We’re seeing private debt become more mainstream; the asset class has a wide runway for expansion across both developed and emerging markets.”