Liquid Alternatives: “A Must-Have Component” To Weather Volatility

September 14, 2020 | Liquid Alternatives, News
https://dailyalts.com/wp-content/uploads/2020/09/640px-Personal_Protective_Equipment_PPE_to_keep_NHS_staff_safe_from_Ebola_15835096215.jpg

A view from Canadian law firm Borden Ladner Gervais LLP.

An article by Kathryn M. Fuller, Carol E. Derk, Ronald M. Kosonic, and Roma Lotay of Borden Ladner Gervais LLP titled “2020 Spotlight on alternative mutual funds – opportunities ahead” published in LEXOLOGY on September 10. Alternative mutual funds (informally referred to as “liquid alt funds”) may emerge “as a must-have component of a portfolio’s personal protective equipment,” says the article.

Liquid alternatives and the COVID-19 pandemic

Investors looking to shelter from the volatility due to the COVID-19 pandemic, yet not wanting to miss market opportunities, could find value in liquid alts.

Alternative investments may provide these opportunities.

What’s more, amendments to securities laws in January 2019 allow alternative asset funds for distribution to retail investors.

These alt funds are a happy middle road between conventional mutual funds and private hedge funds, according to Borden Ladner Gervais LLP.

Everyday investors may therefore use these funds as useful diversification. They also serve as a defensive mantle against over-bullish or toppy markets.

Status of Canadian liquid alts, post-amendment

As of July 2020, liquid alts in Canada had assets worth approximately $10 billion. These were held across 106 funds under 40 different managers.

As at the start of 2020, according to the Alternative Investment Management Association (AIMA), more than two-thirds of the liquid alts AUM was accounted for by bank-owned and large independent fund companies.

Strategy-wise, equity funds were the most popular. However, investors were not so enthusiastic about funds employing market neutral strategies or fixed-income funds using credit strategies.

Several private hedge funds converted to liquid alt funds as provided by the NI 81-102 amendments in January 2019, observe Borden Ladner Gervais.

These amendments also allowed liquid alts funds considerable leeway, for example, short selling, cash borrowing, and derivative transactions became permissible.

Systemic issues that hobble the growth of liquid alts

According to Borden Ladner Gervais, distributors tend to assign higher risk ratings to liquid alts funds than what is warranted by the prescribed Canadian Securities Administrators (CSA) methodology.

These higher risk ratings often deter conservative investors from investing in liquid alts.

“Even when liquid alt funds are suitable for a client, the higher risk ratings may limit the willingness of a dealer to allocate a large percentage of a client’s portfolio to alternative mutual funds,” says Borden Ladner Gervais.

Another issue is the CSA’s “proficiency requirement” for advisors selling liquid alts funds. It stipulates that advisors must complete one of the following courses: the Canadian Securities Course (CSC); the Derivatives Fundamentals Course; or the Chartered Financial Analyst (CFA) Program.

As a result, the available pool of qualified advisors for liquid alts is effectively restricted to advisors registered with investment dealers that are members of the Investment Industry Regulatory Organization of Canada (IIROC).

Various organizations have proposed amendments to the proficiency requirements, meanwhile.

Conclusion

Despite the above, the Canadian market for liquid alternatives has great growth potential, says Borden Ladner Gervais.

“Current market dynamics will likely contribute to further traction for alternative investments, with liquid alt funds becoming an increasingly attractive option for investors outside of bull market conditions.”

Related Story:     Liquid Alternatives: One Solution For Navigating The Challenges From Unprecedented Low Bond Yields                                             

Free Industry News

Subscribe to our free newsletter for updates and news about alternatives investments.

  • This field is for validation purposes and should be left unchanged.


Shape

Latest Alternative Investment News

https://dailyalts.com/wp-content/uploads/2021/11/4081910779_73d2c39615_c.jpg
FinTech: New Players In BNPL, And Down Under, Stocks Are Hammered
November 29, 2021     FinTech, News

Afterpay enters subscriptions market, Monzo’s Pay Later, Suncorp hops onto the BNPL bandwagon, and BNPL stocks get clobbered in Australia

https://dailyalts.com/wp-content/uploads/2021/11/Metaverse-Grayscale.jpg
Digital Assets: Grayscale’s Report Paints The Metaverse As The Next Emerging Market Investment Frontier
November 29, 2021     Digital Assets, News

A report issued by Grayscale Research, a unit of Grayscale Investments, the largest digital asset manager in the world, describes the Metaverse as a potential market opportunity worth over $1…

https://dailyalts.com/wp-content/uploads/2021/11/34129579192_199424d914_c.jpg
Artificial Intelligence: UNESCO Member States Adopt The First Ever Global Agreement On The Ethics Of Artificial Intelligence
November 29, 2021     Artificial Intelligence, News

The first ever global standard on the ethics of artificial intelligence (AI) was adopted by the member states of UNESCO at its General Conference on Tuesday. Audrey Azoulay, director-general of…

https://dailyalts.com/wp-content/uploads/2021/11/DreamSports-Screengrab.jpg
Venture Capital: Indian Fantasy Gaming Group Dream Sports Raises $840M
November 29, 2021     Latest News, News, Venture Capital

Dream Sports announced last week its raise of $840 million from investors led by Falcon Edge, DST Global, D1 Capital, Redbird Capital and Tiger Global, with the transaction valuing the…