Are Canadian investors ready to hedge their bets?

With a potential market correction on the horizon, some investors might be forced to rethink strategies

Are Canadian investors ready to hedge their bets?

There is a growing consensus that the current bull cycle might be beginning to enter its conclusion. Many investors have implemented passive strategies and achieved good returns over the past nine years without doing much, but with a potential correction - and a new investment landscape - on the horizon, many industry experts think some investors will have to rethink their strategies.

Going forward, there are muted expectations for equities, fixed income looks challenging, and commodities also look uncertain. For Dan Elsberry, senior managing director, Franklin K2 Advisors, allocating assets to hedge funds represents a strong opportunity in the current market.

“Had you been an investor in 2009 and decided to just go passive, today you would look like an absolute genius, but going forward we think that changes,” says Elsberry. “If you are a pension plan today, how do you get to your 6% target return? A 60/40 portfolio might not do it. So, although hedge funds have got beaten up over performance over the last few years, we’ve seen that start to turn recently.”

Elsberry oversees K2 Advisors’ multi-manager, liquid alternative strategy fund which is available to accredited retail investors in Canada. The returns that the fund’s long-short equity managers are achieving are certainly grabbing investors’ attention. The health care manager is up 20%, technology is up 23%, materials are up 19%, global is up 10%, and Europe is up 6%.

“Fundamentals matter again; we’re seeing some dispersion in the market, which gets you winners and losers, and long-short equity and long-short credit do well in that environment,” says Elsberry.

“If you look at the market cycle and the potential challenges that face traditional asset classes going forward, this is a great time to utilize hedge funds to diversify your portfolio and reduce the overall risk. It gives investors a fixed income alternative.”

Despite the negative press around hedge funds in recent years, money has continued to pour in and hedge fund managers now control over $3.2 trillion - an all-time high.

“We think the cycle is coming back to hedge funds, and if you had to rank asset classes and performance over the next year or two – you’d probably list equities at the top and then hedge funds next,” Elsberry says. “The consensus is that fixed income and cash are going to be well below those two."

"It’s a great opportunity to be allocating to hedge funds because investors are going to get rewarded, particularly on a risk adjusted basis.”

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