Most investors are familiar with an asset mix consisting of stocks, bonds, and cash. In recent years, it has proven difficult to get the desired steady income by only using these conventional categories. Some investors, tired of low interest rates or averse to the risk of stocks, are turning to alternative strategies to benefit from a more attractive yield to meet their retirement and investment income goals. Alternative Investments (Alt Investments) were previously only available to accredited investors, pension or institutional managers
Alternative investments include such things as private capital, private debt, hedge funds, real estate, infrastructure, commodities, artwork, wine or other tangible assets. Many of these alt assets are not publicly traded on the stock exchange. A traditional disadvantage of Alt Investments was their lack of liquidity. Like real estate, an Alt Investment may not be easily divided into units or sold in a day - it may take more time to sell. Over the last several years, Alt Investments have become available for retail investors through ETF’s or mutual funds or portfolios that build on Alternative investments or Alternative Yield products. Since Alt Investments typically have a low correlation to traditional asset classes, adding Alt Investments to a portfolio provides effective diversification and can reduce overall portfolio volatility.
Hedging is a strategy included in Alternative investments. Hedging means taking an offsetting position in a related security, typically by using derivatives such as options, futures, and short-selling. A portfolio manager may hedge against foreign currencies, credit ratings, interest rates and market risks. Portfolio managers use hedging techniques to reduce their exposure to risk and volatility.
Most Canadian investors are exposed to two key investment risks: stock market volatility and interest rates. If interest rates rise, bonds may lose value. If there is bad economic news, stocks will experience volatility. Since an Alt Investment strategy is uncorrelated to either the stock market or interest rates, it can reduce the swings in the market value of the overall portfolio.
More recently, a change in regulations has meant the introduction of new investment vehicles called Liquid Alternatives. In contrast to Alt Investments, Liquid Alternatives are not direct investments in assets such as property, private equity, or real property. Liquid Alts allow portfolio managers to use traditional instruments (such as stocks and bonds) to convert non-liquid assets into assets that can be bought or sold on a daily basis, sometimes with the use of leverage or short-selling. Portfolio managers may use Liquid Alts to change asset exposure to a more attractive risk/reward profile. The global credit rating agency DBRS Morningstar reported that there were 29 new Liquid Alt funds launched in Canada in 2019. Most of the new products launched in 2019 use long-short strategies to provide investors with positive returns that are not correlated to the stock market, while guarding against downside risk. Liquid Alts gained popularity in 2019 as investors become more familiar with the products and how they perform in a portfolio. Many investors who are looking for sustainable sources of investment income, and are unsatisfied with the low interest rates on today’s bonds, cash, and GIC options, have turned to Alt Investment portfolios or to Liquid Alts.
Please contact us if you have questions or would like to discuss the potential role of Alternative Investments or Alt Yield solutions in your portfolio. For more news and ideas, visit our website at: www.elainekelly.ca.
Elaine Kelly MBA CFP FCSI Investment Advisor, Manulife Securities Incorporated