After proving their resilience amidst volatile markets last fall, alternative investments are increasingly earning a place in investors’ portfolios
SINCE THE markets took a dip in the fall of 2018, investors have been looking for ways to combat volatility. Combined with new regulations that went into effect earlier this year, allowing fund providers to introduce alternative mutual funds to the retail channel, this has led to an increasingly larger role for alternative investments in the average investor’s portfolio.
Performance has also played a part. The equal-weighted Scotiabank Alternative Mutual Fund Index has seen a year-to-date return of 3.56%, while the asset-weighted and equal-weighted versions of the Scotiabank Canadian Hedge Fund Index have seen 3.71% and 5.87% returns, respectively. According to Claire Van Wyk-Allan, director and head of Canada for the Alternative Investment Management Association [AIMA], IIROC dealers have been actively promoting alternative investments, and the AIMA has witnessed positive inflows over the last six months.
“If we look at hedge funds and alternative mutual funds specifically, they have been performing well,” Van Wyk-Allan says. “What is more interesting is the volatility. If you compare the volatility, it is a fraction of the S&P/TSX Composite, as well as the S&P 500.”
The chance to dodge market volatility seems to be resonating with advisors, too. David Little, senior investment advisor at Little Wealth Management Group at HollisWealth, a division of iA Securities, says the market volatility witnessed last fall has given him an entrée into conversations about alternatives with his clients.
“When you look at the volatility last fall, the mandates of these alternative funds show that you want to have them in portfolios,” Little says. “They have an equity component but not beta to the market. That non-correlation allows for growth but also protects if there is a market drop.”
So far in 2019, one of the trends that has stood out for Van Wyk-Allan in the alternative investment space has been an increase in customization and collaboration as institutional investors partner with hedge fund managers, which she says has a knock-on effect in the retail channel.
“As managers increase partnering with institutional investors, collaborating with them on solutions and adjusting fees, we have seen lowered management and performance fees in the retail channel,” she says.
In addition, 2019 has been the year of increased product development in the alternative space, thanks to the easing of regulations in the retail channel.
“More firms that were historically considered traditional asset managers are entering the alternative investment space,” Van Wyk-Allan says. “I know that, in the pipeline, there are large traditional asset managers looking to enter the hedge fund space. This trend I would expect to continue.”
While there has been a recent explosion of product options, Little says he hasn’t allowed that to drive his strategy. “We are snobbish – we don’t get caught up in the noise,” he says. “Alternative products are the new 2019 thing. We look at the companies that have been in the space, not just the ones creating a product for the retail market. Alternatives are only new to the retail space, but they have been around on the institutional side. So while everyone has a product now, we look at those with experience.”
For Little, the biggest challenge is still getting investors familiar with the concept of alternative investments; he’s found that being able to hold up institutional investors as an example helps his cause.
“The problem with clients is that when you explain alternatives to them, it is sometimes difficult to understand,” Little says. “We like to mention how the Canadian Pension Plan Investment Board has approximately 20% of their investments in alternatives. We try to tell them that alternatives’ lower volatility can put them in a better position. That seems to solidify their comfort level.”
That’s also something Van Wyk-Allan emphasizes when educating advisors and investors on alternatives. “If I look at the allocations of Canada’s largest institutional investors, their allocations to alternatives range from 25% to 50%, and their constituents are regular, everyday people – not what you would consider ultra-high-net-worth. It is important, when we think about capital preservation and investors preparing themselves for retirement, to think about alternatives as part of that insurance on their portfolio.”
Both Van Wyk-Allan and Little believe that alternative allocations will continue to grow, especially if another market downturn is in the cards.
“I think alternatives are a great thing because they focus on good returns in volatile conditions,” Little says. “Certainly last fall proved it, and I think you’ll continue to see the demand for them with an inevitable market slowdown.”