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The market is serving up something refreshing

March 5th, 2015 by

Does recent market volatility call for alternative investing strategies?


The volatility of shakeups and shakedowns in the Canadian markets as of late has many investors feeling unsettled. Restless with the status quo, perhaps? And with spring around the corner (we hope), perhaps you might be ready to encounter something new - something that is designed to work in tandem with market volatility. In other words, an alternative strategy. 

Many Canadian investors have yet to hear about liquid alternatives, a set of investment strategies capturing portfolio share in a big way in recent years. Though they’ve achieved some level of mainstream status in the United States, such strategies are still very much on the rise in Canada - and by the looks of data by Lipper, they’re rapidly gaining steam. 

A rising tide lifts all boats

Last year, liquid alternative assets reached a total net positive of $340 billion for 2014, representing a 130 percent surge over the past five years and growth by the seven fold over the past ten years. But some experts contend the true test of a portfolio management strategy is its ability to hold its ground during drawdowns in times of higher-than-normal volatility. 

In the U.S., liquid alternative assets under management tripled in value over the past three years, from $110 billion USD in 2011 to $319 billion USD by late last year - but in Canada, where tanking oil prices and a sinking loonie toying with market stability, alternative strategies, popular as they might be, have seen comparatively slower growth - even though one of their main features is downside protection against market volatility. 

Such a quality might speak loudest to the risk-averse investor, we suppose (but isn’t that almost everyone?). At any rate, an article by the Financial Post makes mention of a few experts who suspect liquid alternatives could burst in growth in the coming months if market volatility continues its climb (which many analysts agree: it likely will).

5 must-knows about alternative investments

As with anything, knowledge will prove to be power. Aside from downside protection against a volatile market, what do you really know about liquid alternative strategies? Here’s a quick recap of what we learned when we last caught up with Vivian Lo of Aston Hill Asset Management, one of the largest providers of open-ended alternative mutual funds in terms of assets under management.

  • First, a liquid alternative strategy aims to combine the benefits of a hedge fund - mainly unique portfolio strategies that can dampen volatility - with the benefits of a mutual fund - transparency and liquidity. This calls for active portfolio management.
  • "Alternatives" can encompass any investment other than equities, bonds, or cash, Lo explained. They broadly refer to real assets (real estate, timber, infrastructure) as well as private equity and hedge funds - but can also refer to a wide array of investment opportunities.
  • With its recent period of strong growth, the benefits of liquid alternatives are making a splash in the market - such as lower fees, less paperwork and the ability to both diversify portfolio risk and provide returns not correlated to stocks and bonds. Variety is the spice of portfolio management.
  • Not quite clear on that last part? No problem. You might have had the misconception that funds making use of these strategies were designed to substitute the stocks and bonds in your portfolio. Not so. Liquid alternatives are best used to complement a portfolio’s exposure to stocks and bonds to smooth out some of the volatility. 
  • Unlike hedge funds, liquid alternative funds are made accessible to the everyday investor with initial purchase amounts that run as low as $1,000. Daily liquidity and enhanced risk reduction are just two more things that the everyday investor may want to write home about.

The biggest risk in liquids

As with any investment, there are risks associated with liquid alternatives - making it important that you do your due diligence before diving in. But as Lo recently quoted from a Morningstar article, “The biggest risk is underperformance” in an up market. Less returns when the market rips? Perhaps it’s the price one pays, so-to-speak, for heightened protection in a down market; it might also be the price more and more investors are willing to pay if market volatility continues.

Liquid alternatives may be a relatively newer category in the Canadian investment lanscape, but if recent trends south of the border are telling us anything - it’s that the timing really couldn’t be better to do your research on alternatives to the status quo.


Aston Hill also told us that you can learn more about liquid alternatives in their Education Center.


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