AIMA prepares for investment 'sea change'

Alternative products will be officially open to retail investors from January 3

AIMA prepares for investment 'sea change'

A new era for Canadian investing begins on January 3 but there remains a disconnect between the advisors and retail investors when it comes to knowledge of alternative strategies.

Claire Van Wyk-Allan, Head of Canada at the Alternative Investment Management Association, told WP there is widespread excitement across the industry at being front and centre of a “transformative” change in the industry now the alternative mutual fund framework has been agreed and is open to the retail market. Previously, it was available only to institutional and accredited investors.

However, Van Wyk-Allan highlighted a finding from the recently released Alternative Mutual Fund Market Impact Report, published by AIMA and Scotiabank, that said 70% of wealth advisors rated their understanding of alternatives as high or very high, while they rated their investors’ understanding of alternatives as low or very low.

She said: “There is additional disconnect between advisors, unless they are a discretionary portfolio manager, and clients. Advisors need to turn around and sell this to their clients.

“That plays into the education piece in the media where we are front and centre in educating the general public. Hedge funds are not the scary myth they have been perceived to be in the past and sometimes currently - they truly offer downside protection and risk reduction.”

The research also revealed that nearly one of four wealth advisors in Canada said they could invest as much as 25% of their investment portfolios in alternative investment strategies. Pending amendments to the rules by the Canadian Securities Administrators, an early prediction has put the potential size of the alternative mutual fund market at $20 billion over the next five years.

Belle Kaura, chair of AIMA, said: “It’s important for the retail market to have access to these products and for the advisors to be able to provide increased choice to investment alternatives to help retail investors meet their financial goals.

“And by reducing the market risks, the risk-adjusted returns that are non-correlated to the traditional equity and fixed income market is particularly important as we are nearing the end of the economic cycle.”

With economic conditions tightening, the landscape appears ideal for an expansion of the advisor’s toolbox, giving them more options to preserve capital. Some alternative products are already available under exempted relief but the floodgates are really set to open officially from January 3.

Van Wyk-Allan said the statistics suggest a huge increase in uptake is imminent.

She said: “A total of 36% of advisors already use alternatives in their portfolio and another 16% say they plan to do so in the future. Given where we are with the current cycle, I think there’s never been a better sign to start considering alternatives, especially as volatility has returned to the market and we are in a seemingly rate-raising environment for the time being, although the Fed and Bank of Canada have signalled they are slowing down on rate hikes and we might only see one more in 2019. But capital preservation is going to be paramount in the next 12-18 months.”

In other findings, the report revealed that half of all manager respondents anticipated launching alternative mutual funds and an additional average growth in assets under management of 14% in the year the news rules are implemented.

It also said that advisors are most interested in allocating to equity long/short (63%), private credit (41%) and long/short credit (37%) strategies and predicted that disruption from the new rules may erode private hedge fund sales.

The potential gold rush towards these new products raises the prospect of costly missteps from investors or advisors who don’t have a full grasp of how these products work.

Van Wyk-Allan said this concern works two ways. “You need to have experience of shorting and leveraging to truly understand how these instruments work. There are concerns that the products won’t have the same calibre of quality of manager perhaps, depending on what we see launched.

“On the flipside, if you look at a boutique hedge fund manager who has got a lot of experience of leveraging and of running hedge fund strategies, they’re concerned that they don’t have enough tools in the toolbox under these restrictions and requirement.

“Hence why we’ve seen so many conversations for exempted relief, especially as it relate to long and short relief and equity market neutral. The portfolio manager wants to feel like they can do good and right by the end investor and not feel overly constrained where they can’t deliver alpha or proper capital preservation.”

Van Wyk-Allen added that there is a full education programme under way, reaching out to retail investors and advisors to explain how alternatives differ from traditional products. There is also a course available, with CE credit, and a due diligence questionnaire and guidelines for dealer head offices.

Kaura said: “We are very excited that this alternative mutual fund framework is finally where the benefits can now be accessible to retail investors. It really is the largest innovation that Canada has seen for many years and promises to see a convergence between traditional fund managers and boutique hedge fund managers. We are very excited.”

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