Portfolio manager says timing is right but many advisors will be on a learning curve
The influx of liquid alt funds into the market will be “like a gold rush”, according to a leading asset manager.
However, David Picton, president and portfolio manager at Picton Mahoney Asset Management, said that while the timing is right it’s going to be tough for advisors to cut through the plethora of products to find the best ones for their clients.
Picton Mahoney this week launched three new alternative funds: the Picton Mahoney Fortified Active Extension Alternative Fund; the Picton Mahoney Fortified Market Neutral Alternative Fund; and the Picton Mahoney Fortified Multi-Strategy Alternative Fund.
Picton said the products are a result of the firm’s reorganization three years ago, which was designed to get the company ready for the “new fund landscape”, and the subsequent work of a six-person team tasked with putting together products that fit this new world.
He believes the time is now for liquid alts in the retail space because of the excellent bond returns going back 37 years coupled with last year’s 30-year interest rate low, high stock market multiples and the fact we’re late economic cycle.
He said: “The premise of these alternative funds should be to provide sources of returns that are not so correlated or exposed to these other two betas that everybody owns.
“By doing that, if you can add in a diversifier or something that makes your portfolio more resilient, you should improve the overall return potential of that portfolio going forward. So I think the timing is immense and if you get the right application and tools they can be incredibly helpful.”
The problem, however, is that while a select number of Canadian firms have successfully utilized hedging strategies, a host of firms who do not have that experience will now be entering the space.
Picton said that advisors who had previously shied away from this area will be left grappling with a new product suite from some unfamiliar providers. He said there are three steps asset managers should walk through to ensure proper due diligence to determine how best to use these new liquid alt funds.
He said: “The first thing I’d start with is why you want to use this? What is the net benefit to the investor here? What risks are you trying to protect? What diversification angle are you trying to take advantage of? That’s the easy part.
“Once you sort that out, you’ll be able to cut through all these different products that are being released to narrow it down to the specific ones that are trying to solve the equation for you.”
Picton said if you wanted an income-related stream but were afraid of interest rates going up, an alternative product could protect against this while still giving you access to income. Alternatively, you may be less worried about the market but want more diversification in the equity space.
The next stage, he said, is to analyse the manufacturer’s track record. How did they do through 2008? Or the taper tantrum of 2013? How did this product, that is going to be replicated in this new alternative framework, do?
The last part of the process, said Picton, is doing a deep dive into the characteristics of the firm.
He said: “What kind of risk processes do they have that assures me you either have experience with them or you’re not going to get way offside and give me something, some unintended consequence that should never have happened.”
While Picton joked that he hopes his funds become the staple of all good portfolios, he expects there will be an incubation period in Canada because its hedge fund industry is not as developed as in the US.
He said: “There is not as much awareness, quite frankly, of how these things work. Bigger market impact may have to wait for the market to season or, unfortunately, maybe a bad event where some of these products show their true value as diversifiers in a portfolio.”
PICTION MAHONEY’S NEW FUNDS
Picton Mahoney Fortified Active Extension Alternative Fund
Designed to provide long-term capital appreciation and style diversification for equity portfolios, with an attractive risk-adjusted rate of return and similar volatility to traditional equity markets.
Picton Mahoney Fortified Market Neutral Alternative Fund
Designed to provide consistent long-term capital appreciation and an attractive risk-adjusted rate of return, with less volatility and low correlation to traditional equity markets.
Picton Mahoney Fortified Multi-Strategy Alternative Fund
Designed to provide consistent capital appreciation with an attractive risk-adjusted rate of return, with low correlation to traditional balanced or diversified strategies.