Toronto-based Waypoint Investment Partners launch their first liquid alternative mutual fund.

The Waypoint All-Weather Alternative Fund is a defensively-oriented mutual fund. It combines a portfolio of capital distributors and capital compounders with a put option overlay to shield from market drawdowns.

The fund achieves the twin goals of portfolio growth and capital preservation in a liquid alternative format. The strategy delivers superior risk-adjusted returns across market cycles.

Defensive armor: the put option overlay

How long do you think your portfolio would need to recover from a 30% market correction?

It would take all of 13 years, provided you generate 11% annually after that. And that would just “catch-up” with where you would have been had you been compounding at 8% annual.

That is a sobering viewpoint on the impact of downturns on a typical portfolio.

The Waypoint All-Weather Alternative Fund uses put options to minimize the impact of market drawdowns on a portfolio that includes public equity investments.

Put options are cheaper to buy in rising markets. However, they turn relatively more expensive when markets are on a decline. Waypoint’s strategic overlay, therefore, uses options to protect the core portfolio.

The fund pays out the cost of these options (“put premiums”) from the dividend income generated by the equity investments in the core portfolio.

Waypoint All-Weather: core investments

The Waypoint All-Weather Alternative Fund invests in a portfolio of capital distributors (70 to 90%) and capital compounders (10 to 30%).

Sustainable capital distributors are companies with cash flows that provide high dividend yields. Their management focuses on sustaining and growing a dividend payout. These companies have relatively modest financial leverage, allowing comfort in difficult economic situations.

On the other hand, continuous capital compounders are small and mid-cap companies that are usually off analysts’ radars. These companies feature economic models that compound capital at or above their cost of capital. Managements focus on growth and finance it through the public markets.

The fund rounds off its overall strategy with a tax-efficient approach to capital gains and distributions.

According to the fund, this strategy has delivered solid returns since inception.

Another liquid alternative mutual fund that focused on cash flow was launched by Waratah Capital Advisors earlier this month. This fund’s portfolio comprises North American equities with a focus on Canada and similarly uses options and short positions for risk protection.

Waypoint All Weather Alternative Fund

“The Waypoint All Weather Alternative Fund is built to limit volatility and downside versus traditional funds,” says Ryan Marr, Partner and Portfolio Manager. “As part of an asset mix, this Fund can help diversify portfolios and improve investment outcomes, regardless of market direction.”

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