Liquid alternatives are coming. Are you ready?
The financial services industry is no stranger to disruption. Those on the outside may think the industry is slow to respond and driven by the status quo. But those on the inside know that every week brings a dramatic change, and that we’re always adapting to what’s coming next.
Case in point: there are new investment approaches on the horizon for retail investors. They’re called liquid alternatives. They’re different from more traditional mutual funds and exchange-traded funds (ETFs). And we believe they’re going to become very popular, very quickly.
So, what are liquid alternatives? Simply, they’re hedge fund strategies delivered to retail investors in a mutual fund or ETF.
Timelines are vague … but companies are acting
In the past, alternative investments were only available to high-net-worth investors. However, with the Canadian Securities Administrators’, Modernization of Investment Fund Product Regulation – Alternative Funds notice, all retail investors will soon have access to liquid alternatives in their portfolios.
Why such a bold proposal? To give investors more diversification opportunities with an asset class that has historically had little correlation to stocks and bonds.
While there’s no hard date regarding finalization, companies are launching liquid alternative funds and ETFs as we speak. Get ready for a flood of launches.
Liquid alternative strategies
In the U.S., where liquid alternatives have been available to retail investors for a number of years, the big liquid alternatives categories include:
- Equity hedge – buy securities that are expected to increase in value and short sell those expected to decline (a.k.a. long-short strategies)
- Event-driven – seek to capitalize on price inefficiencies that may exist before a corporate event (e.g., M&A activity, bankruptcy or an unexpected announcement during an earnings call)
- Global macro – choose investments based on the overall economic and political situations in various geographic regions
- Relative value – capitalize on the price or rate (if bonds) differences between similar securities, typically taking a long position on the undervalued security and a short position on the overvalued security
- Multi-strategy – allocates assets to different investment strategies for diversification purposes and to lower overall risk
We expect Canada will adopt similar liquid alternative categories as those in the U.S., so be prepared to hear a lot more about this in the near future.