Without much fanfare, Canada’s securities regulators last year revamped the rules for mutual funds and exchange-traded funds, allowing for the creation of liquid alternative strategies that utilize many of the tactics wielded by hedge funds for wealthy investors.
It has been a year since the so-called ‘liquid alts’ were approved for fund investors and their introduction and take-up by retail investors was slow in 2019 because equity markets were strong.
That looks to be changing.
“We seem to have kind of rounded a corner in terms of the product development around alternate assets,” says Daniel Straus, vice-president of ETFs and financial products research at National Bank Financial Inc.
According to the Canadian Associate of Alternative Strategies and Assets, investors have put a total of $5.27-billion into 82 funds as of Sept. 30, 2019. That figure includes both alternative mutual funds and ETFs and is dwarfed by the $1.63-trillion in mutual funds and $205.1-billion in ETFs in Canada at the end of 2019.
Easing of rules concerning concentration, leverage and utilizing long and short positions, allow for the creation of funds that are “not a stock, not a bond but uncorrelated from both and an ingredient that would help improve an overall portfolio,” Mr. Straus explains. “It really allows a new generation of hedge fund style mutual funds and ETFs to be born – and fund issues have followed up with dozens of filings.”
The Toronto-based ETF strategist points to a number of new alternative asset ETFs that are available to investors that utilize a hedge fund approach.
Those include four alternative-asset ETFs from Picton Mahoney; the Picton Mahoney Fortified Multi-Strategy Alternative Fund ETF (PFMS), the Picton Mahoney Fortified Market Neutral Alternative Fund ETF (PFMN), the Picton Mahoney Fort Income Alternative Fund (PFIA) and the Picton Mahoney Fortified Active Extension Alternative Fund (PFAE). The funds are intended to reduce downside exposure, while building wealth over the long term regardless of overall market conditions – hence the term “market neutral” – according to the firm.
“They are a very storied asset manager that has a track record of successfully managing hedge fund style investments,” Mr. Straus says. “So seeing if they can deliver what they are known for in an ETF form is something that we are excited to observe.”
Straus also singles out AGF Management Ltd., which launched a trio of liquid alternative funds in October: the AGFiQ US Market Neutral Anti-Beta CAD-Hedged ETF (QBTL); the AGFiQ US Long/Short Dividend Income CAD-Hedged ETF (QUDV), and the AGFiQ US Long/Short Dividend Income CAD-Hedged Fund.
Last year, National Bank launched a liquid alternative fund, the NBI Liquid Alternatives ETF (NALT), designed to generate a positive return with a low correlation to global equities and with lower volatility. Since its launch at $20 a unit last year, the ETF has attracted approximately $35.5-million and is currently trading around $21.
“That one uses futures to mathematically track a very diversified set of underlying asset classes to create a kind of diversifier or market neutral profile,” Mr. Straus says. “We consider it an active alternative style mutual fund available as an ETF.”
He also points to Calgary-based investment firm, Accelerate Financial Technologies Inc., which last year rolled out three hedge-fund style alternative ETFs that, instead of having management fees, collect a performance fee if they beat set benchmarks.
“The idea behind these ETFs is that the managers are signalling to potential investors that their success is very much tied to investors’ success,” Mr. Straus says. “If the ETFs don’t perform, they make no money.”
The firm’s slate includes: the Accelerate Private Equity Alpha Fund (ALFA), which uses derivatives and cash for its short and long strategy for U.S. equities; the Accelerate Enhanced Canadian Benchmark Alternative Fund (ATSX), which aims to beat the broader Canadian equity market with a long-short approach and; the Accelerate Absolute Return Hedge Fund (HDGE), which invests primarily in equities expected to outperform the Canadian equity market and while selling short some equities it expects to lag the market.
Alternative ETFs that take a market-neutral approach appear to have had “the most success to date,” according to Mark Raes, head of product with BMO Global Asset Management in Toronto.
Investors understand the benefits that an alternative asset fund can offer, he says, but the funds have been slow to accumulate capital because equity markets have been buoyant.
“People understand the value proposition first and foremost, differentiated returns, therefore better for your portfolio. It’s just going to take a little bit of time for these products to build a track record and [their popularity is dependent] on what the market is doing,” he says.
That thirst among investors for alternative ETFs is apparently building. Toronto-based CI Investments Inc. recently introduced ETF versions of three liquid alternative mutual funds, citing investor demand.
“Even though there were mutual fund versions of these products that have existed for about a year now…a lot of advisors wanted an ETF structure as well,” says Peter Tomiuk, senior vice-president of ETF strategy at CI First Asset, a division of CI Investments.
CI’s new ETF roster is comprised of: the CI Lawrence Park Alternative Investment Grade Credit ETF (CRED), which invests mainly in widely traded securities and investment-grade debt of institutions in the developed world and promises a consistent return with a low correlation to equity and fixed income markets; the CI Marret Alternative Absolute Return Bond ETF (CMAR), which invests in debt and other income-producing securities internationally and relies upon a “combination of top-down macroeconomic analysis involving the assessment of economic, political and market trends, complemented by a bottom-up company and security-level analysis;” and the CI Munro Alternative Global Growth ETF (CMAG), which invests mainly in international equities and uses a long-short equity strategy.
Investors can expect more alternative ETFs from CI Investments and other investment firms to continue to experiment with hedge fund style ETFs. To date, CI Investments has attracted $1.1-billion for its liquid alternative funds. The CI Lawrence Park Alternative mutual fund (CIG2190) had a one-year return of 5.8 per cent and about $433.9-million in assets under management (AUM) as of Jan. 31, while the CI Marret Absolute Return Bond fund (CIG4191) saw a return of 7 per cent and $137.3-million in AUM and the CI Munro Alternative Global Growth fund (CIG2192) had a one-year return of 13.2 per cent and AUM of $605.8-million.
“I think it is safe to say that just with the assets that have been raised in this space and the demand for – once again where we are in the market – we do see opportunities for growth in the space,” Mr. Tomiuk says. “We do look at it as a very exciting space and are very happy to be early adopters as well.”