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Industry insider says going alternative (think: liquid) is the new norm for smart investors

December 10th, 2014 by

Find out what alternative mutual funds mean for Canadian investors - from Vivian Lo of Aston Hill Asset Management


There’s a new alternative practice going mainstream and, no, we’re not talking about the latest in power yoga. It’s a collective of alternative investment strategies that are making their way from the portfolios of institutional investors to a financial advisor near you. And this is a practice that could be just as good as yoga for your, ahem, bottom line: transparency, lower fees and liquidity are just some of the perks.

Expect to see and hear a lot more about alternative investing in the coming year, says Vivian Lo of Aston Hill Asset Management, as some of the strategies become increasingly accessible for Canadian investors.

Why go alternative? Vivian explains…

  • Q: What is alternative investing and why is there a shift to alternative mutual funds (seemingly) all of a sudden?

I think it’s important to first define what ‘alternatives’ mean. In the world of investing, it can encompass any investment other than equities, bonds or cash. So really, ‘alternatives’ is a pretty large category. The traditional vehicle for investors in alternatives is the hedge fund. Typically though, alternatives broadly refer to hedge funds, private equity, and ‘real’ assets such as real estate, agriculture, timber and infrastructure.

While the shift to alternative investing might seem out of the blue to retail investors, over the past decade it’s been one of the furthest-reaching developments in global institutional investing that we’ve seen in the past quarter century. To put it in context, the Ontario Teachers’ Pension Plan has allocated 37% of their portfolio to alternative assets. However, adoption by Canadian advisors and retail investors has been slower. This follows the common pattern of institutions adopting innovations first, followed by individual investors once pricing and packaging evolve to meet their needs.

  • Q: What does the rise of alternative investing mean for Canadian investors in particular?

I read a noteworthy statistic the other day - nearly four in five investors globally would take safety over performance if forced to choose. It’s critical that Canadian investors look beyond the traditional 60-40 allocation to stocks and bonds and incorporate investments that can help improve the outcome of their portfolio. One way to reduce risk within your portfolio is through diversification – don’t put all your eggs in one basket! (Vivian spoke to us previously about the importance of diversification.) Alternative investments in particular have proven their ability to add diversification, improve risk-adjusted returns, reduce downside, and lower sensitivity to both market and interest rate moves. 

  • Q: Your firm recently introduced us to the term “liquid alternatives”. What does this term mean?

I touched on the meaningful growth over the past 10 years of alternatives within the institutional investment community, but we are now in a new wave of global growth – the migration of alternatives from institutional to retail markets – and with this migration, the term ‘liquid alternatives’ has been born. Liquid alternatives, which use strategies similar to hedge funds but in a mutual fund structure, aren’t well known in Canada. The term marries the alternative strategies used by traditional hedge funds with the liquidity and transparency of retail mutual funds.

  • Q: Explain a bit about how Aston Hill has undertaken to use alternative strategies in its funds, and how your funds are, as you say, “alternative strategies in a mutual fund wrapper”.

Liquid alternatives aren’t just a trend to us. Our managers have been incorporating hedge fund strategies within their mutual funds since they first joined Aston Hill. These include portfolio management tools such as short-selling, derivative strategies including options, and investing in private securities – keeping within regulatory limits. Our mutual funds offer retail investors the benefits of alternative strategies typically only available to institutional and high-net-worth investors at a lower cost than a traditional hedge fund, and with the benefits of a traditional mutual fund structure: daily liquidity, increased transparency, a low minimum investment, and no performance fee. 

  • Q: Why is it significant that we as retail investors can now take advantage of these liquid alternative strategies?

Packaged for the mainstream retail investor, liquid alternative funds make alternative investments accessible to any investor who can afford their initial purchase amounts, which often run as little as $1,000. Once investors have bought into a fund, they also enjoy daily liquidity to make additional purchases or redeem their holdings. Moreover, investors in liquid alternatives don’t pay performance fees; they keep all of the fund’s gains. Liquid alternatives also offer the advantage of more robust reporting than hedge funds about their strategies and performance.

  • Q: What benefits of liquid alternatives are you most excited about?

Liquid alternatives can offer downside protection when markets fall and help preserve your invested capital. Historically, liquid alternatives have performed best during market downturns, which is exactly when we need protection the most! There is also a higher return potential because you reduce risk and smooth returns when you diversify, like I mentioned earlier. We put together a hypothetical portfolio analysis to demonstrate the impact of alternatives over time. If you take a look at the portfolio, you’ll see it produced higher returns, lower volatility and a smaller loss at its lowest point than a portfolio without alternatives.

  • Q: Is it still early days for understanding how liquid alternatives will perform for investors?

While liquid alternatives are a relatively new category, the benefits of the underlying strategies - traditional alternatives - have been tested over time and proven their ability to decrease volatility. But like any investment vehicle, there are risks associated with liquid alternatives and it is critical for advisors and investors to educate themselves on these risks in conjunction with understanding the benefits. I think Morningstar has best summarized the downside potential of liquid alternatives: “The biggest risk is underperformance.” On average, alternatives haven’t returned as much as stocks in bull markets. But they also haven’t been down as much as stocks in bear markets. It’s important to remember the role liquid alternatives play within a portfolio, which is that of providing risk-reduction and decreasing volatility of the overall portfolio.


Under Vivian’s management, the Aston Hill Growth & Income Fund won the 2014 Lipper Award for Best Fund (over 3 years return) in the Alternatives category. For anyone wanting more information on liquid alternatives, visit Aston Hill’s Liquid Alternatives Education Centre.


Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments and the use of an asset allocation service. Please read the prospectus of the mutual funds in which investment may be made under the asset allocation service before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.

Jun 26 2017 12:22am

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