Will the Canadian exempt market loosen?

The growth today is in alternative investments: Hopefully retail investors get to take part in the coming boom.

The alternative investment space has generated much talk over the last several years. With investors disappointed in traditional strategies and pension funds desperate for yield, it is no wonder interest in alternative investments is booming.  

It is no overstatement to say there is a bit of a sense of excitement in the sector these days. The Ontario Securities Commission recently proposed new regulations allowing an investor to buy $10,000 worth of equity in a company featuring a less-detailed disclosure document, or "offering memorandum.”  This expansion of the pool of investors qualified to investment in alternatives is feeding optimism in the industry.  

An executive in the alternative space, Devon Cranson, head of Cranson Capital, recently explained that smarter regulations could generate a vast new audience for his company’s investments in condominium development, tech companies and medical buildings.

in an interview with WP, he noted that, “The exempt market now represents 3% of the population. With new regulations around exemption we could have 20-30% of the population. It would be a huge boom in our investor base."

The new Ontario regulations bring the province in line with Alberta, which is a good thing. Of course, there will be those who will fret that investors will fall prey to unscrupulous fund managers. But let’s admit it: This is 2014. Equity culture has been a large part of the culture for a couple decades now. The expansion of business and investing sections in newspapers, an explosion in online financial tools and 24-hour business news stations mean that the average Canadian today is radically more educated and sophisticated about investing than ever before. Canadian investors are an educated bunch. If  they are also smart, they will not want to miss out on the coming boom in the alt space.  

McKinsey & Co., the global consulting firm, released a report this week—"The Trillion-Dollar Convergence: Capturing the Next Wave in Alternative Investment"—that paints an interesting picture of the fund management industry. According to the report, investments in alternative sector mutual funds will account for up to 50% of net new retail revenues over the next five years. Assets in hedge funds have already grown ten-fold since 2005. But net flows into alternative investment products could grow at an average annual pace of 5%, much more than the one or two percent many have been predicting. By 2020 the $7.2 trillion alternatives space could comprise 15% of global fund management assets and produce nearly 40% of industry revenues.

Alternatives are the way of the future according to McKinsey. Investors are "bar-belling" their investment portfolios; that is, low-cost beta strategies achieved through index funds are being combined with "diversified alpha" and "exotic beta" that the alternatives offer. The strategy is this: Index the market and make some extra return through more complex alternative strategies. What else can investors do? Radically low interest rates have created a desperate pursuit for yield. Alternatives that can generate returns 'beyond alpha' are in demand. As investors continue to seek out yield by any means possible, the new cash flows into alternative funds will represent “50 percent of the net new retail revenues that U.S. retail asset managers will make over the next five years” according to the McKinsey report. 

Let’s hope Canadian investors are allowed to take part in the boom.