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There are more than 100 liquid alternative investment funds in Canada that have amassed more than $8-billion in assets under management since their launch in early 2019.

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Liquid alternative investment funds – known as “liquid alts” – have only been available to many Canadian financial advisors and their clients since January, 2019, but it hasn’t taken long for these products to prove their worth in investment portfolios.

“With the uncertainty in the market and the unprecedented scale and the destruction of business worldwide, [gross domestic product] forecasts are impossible to rely on with any certainty. What is certain in these uncertain times is the value of alternatives,” says Belle Kaura, chief compliance officer and vice-president of legal at Third Eye Capital Corp. in Toronto, and chair of the Alternative Investment Management Association (AIMA) Canada.

That includes liquid alts, she says, pointing to the performance of the equal-weighted Scotiabank Alternative Mutual Fund Index in March, when stock market losses were at their deepest.

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The index, which tracks Canada’s liquid alts universe, was down by about 6.6 per cent month over the previous month compared with a decline of 17.7 per cent for the S&P/TSX Composite Index.

Although alternative investments have a track record of mitigating losses and even producing positive returns in down markets, liquid alts remain largely new to Canadian advisors and investors as the rules that allow these funds to be sold in Canada only came into effect on Jan. 3, 2019.

Liquid alts offer alternative strategies that in the past were available only via hedge funds to qualified, typically high-net-worth clients and institutional investors, to a wider audience through mutual funds or exchange-trade funds.

Liquid alts have amassed more than $8-billion in assets under management (AUM) as of March 31, according to Investment Funds Institute of Canada (IFIC) data.

What’s more, their recent performance is likely to lead to increased demand among advisors and investors who seek all-weather returns, downside protection and diversification from traditional asset classes such as stocks and bonds.

“I’m hearing of more interest from advisors in the retail channel, and certainly there are a lot of eyes looking at funds that have performed well,” says Claire Van Wyk-Allan, director and head of Canada for AIMA.

Still, experts caution that not all liquid alts have performed well during the recent stock market drop, illustrating the diversity of the asset class, which often includes using leverage for both defensive and offensive strategies.

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“There’s a real important distinction to make among [these strategies],” says David Picton, president, chief executive officer and portfolio manager of Canadian equities at Picton Mahoney Asset Management, which has a suite of liquid alts available within its stable of investment funds.

The key hallmark of most liquid alts is the ability to leverage up to an aggregate limit of 300 per cent, he says. But how funds use this leverage often sets them apart.

“Some of these liquid alts use leverage for what I would say is ‘good,’ and some of them use leverage for what I might say ‘is not so good,’” he says.

The “good” involves leverage in long-short positions on securities that “neutralize” risk associated with broader bond or equity markets, Mr. Picton says.

“Then you can use leverage for ‘not so good’ [reasons], when you take bets you have in a long portfolio and magnify them,” he adds.

In March, liquid alts that employed long-short position were relatively flat, acting as advertised in difficult market environments. But more offensive strategies looking to amplify long positions generally fared worse than traditional equity mutual funds, he says.

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“You can’t paint liquid alts with one brush,” Ms. Van Wyk-Allan says. “You really need to do your due diligence, like with any investment.”

Protection against broad market risk is certainly among one of the more prominent strategies of liquid alts. But Mr. Picton says that aim alone is likely to make a liquid alt unsuccessful because it would not be especially useful for the long-term.

“If you add in something that’s very defensive that doesn’t generate a return, it doesn’t necessarily benefit the long-term, risk-adjusted return profile of a portfolio,” he says.

However, selecting among the many options in the liquid alts space is often challenging for many advisors, who are often less familiar with the strategies hedge funds use. But Mr. Picton says advisors need to start adding liquid alts to portfolios because interest rates on risk-free government bonds is “effectively zero” and equities will likely be increasingly volatile.

The choices available are growing quickly. There were more than 100 liquid alts available in January, up from 40 in March, 2019, IFIC data show.

And more liquid alts are coming to market. That includes Ninepoint Partners FX Strategy Fund, which Toronto-based Ninepoint Partners LP launched in mid-April. The fund aims to generate long-term returns by investing in futures for 15 currencies on a long and short basis, based on macroeconomic conditions, and is subadvised by Boston-based P/E Global LLC.

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“We would like to have launched [the fund] at the start of the year given the underlying hedge fund strategy was up by 22 per cent [by mid-April],” says James Fox, co-CEO and managing partner of Ninepoint Partners.

Interest was high on the product even before the launch, he says, noting that an informational webcast in April drew more than 100 advisors across Canada.

But while liquid alts’ profile is growing, they still have a long way to go compared with their counterparts in the U.S. and Europe, which have more than $600-billion (U.S.) in AUM, collectively, according to AIMA data.

Chris Douglas, financial planner with Manulife Securities Inc. in Winnpeg, is among the many advisors who have yet to use liquid alts in clients’ portfolios. He says many of his clients are now retired and stick to more traditional, conservative strategies.

“Many of the products are too new to have the investment metrics we use to compare and select [fund] managers,” Mr. Douglas says.

Still, he admits liquid alts are intriguing, and “we’re keeping an eye on them.”

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Ms. Van Wyk-Allan notes the industry still has work to do to inform advisors and investors of the benefits of liquid alts, including how they can enhance retirees’ portfolios. Certainly, their recent performance is turning heads, but she cautions investors shouldn’t view them only as vehicles designed for short-term purposes.

“If investors and advisors had added them [to portfolios] prior to the downturn, the ride likely would’ve been smoother through this volatile period,” she says. “But we want to reiterate the true benefit for investors is to hold these strategies as evergreen investments in their portfolios.”

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