Canadian retail investors looking for exposure to hedge-fund like strategies that can involve leverage and short-selling are being inundated with new options, following a rule change in January.
More than a half-dozen firms have brought so-called “liquid alternative” products to market since regulations barring them from doing so were lifted at the beginning of the year.
Prior to the regulations being altered, only a few firms were able to offer such products after applying for exclusions.
Alternative investments such as real estate and private equity don’t offer investors the ability to buy and sell at a moment’s notice. Liquid alternatives give retail investors access to these same strategies, which have only been accessible by institutions and high-worth individuals, while also giving them the ability to easily add or subtract from their positions.
As soon as Canada’s restrictions were loosened in January, a wave of new products, beginning with Desjardins Global Management Inc.’s liquid alt ETF, began to the hit the market. Only weeks after Desjardins, National Bank launched an ETF, while Accelerate Financial Technologies Inc. has filed a prospectus for three ETFs it expects to be on the market in March.
In the mutual fund space, Mackenzie Investments, iA Clarington Investments, CI Investments and CC&L Funds have each launched multiple products in the past two months.
On Monday, Franklin Templeton, known as a provider of traditional mutual funds, will add to the expansion.
First, the fund will index 50 hedge funds and aim to replicate their returns. On the long/short side, the fund will also identify the most popular stocks that alternative asset managers are buying and take long positions in them while shorting S&P 500 or futures contracts and any individual names it deems unattractive. Thirdly, the fund will target risk premia.
Green said the fund, which charges a 0.9 per cent fee, is meant to dampen volatility when combined with traditional portfolios, but wouldn’t go as far as calling it low risk. The fund isn’t meant to be invested in alone, he said. Instead, like many liquid alts, it’s supposed to one piece of the puzzle.
“It’s a building block solution to be used in building a broadly based diversified portfolio,” he said.
Canadian market participants are hoping to replicate the success such funds have had in the United States.
Similar regulations were dropped in the U.S. in 2013 and in only five years, the liquid alt market has rapidly expanded to be worth US$225 billion. According to a 2018 Scotiabank report, the Canadian market could grow to be worth $20 billion.
“The rush to get liquid alts is really predicated on where we are in the market … and the need for non-correlated market instruments akin to hedge funds,” said Jay Aizanman, director of business development at Desjardins Global Asset Management.
“There are plenty of strategies that are non-market correlated that fit this exact point in time well and there’s going to be people who are trying to get those solutions to market.”
Hedge funds are usually associated with high-risk strategies and so it would be easy to paint liquid alts with the same brush, Aizanman said, but that’s not necessarily the case. Aizanman describes Desjardins’ ETF as a low-risk strategy because it does not use high leverage or derivatives.
Instead, half the fund is used for offsetting long and short positions, while the other half — along with money that the fund will borrow — is kept in low-risk money market funds.
The ETF, which has a one per cent management fee, has gained a per cent since it began trading on the TSX in January and closed Thursday at $20.20.