Liquid alternatives: challenges and opportunities for the financial services industry
Liquid alternatives – hedge fund strategies delivered to retail investors in a mutual fund or ETF – are coming to Canada. And they’re going to be disruptive.
By opening up a whole new asset class to retail investors, mutual fund managers and alternative investment managers are going to face plenty of challenges and opportunities. Liquid alternatives will be good for the industry and investors, but investment managers must do things right.
The big challenge: understanding
Helping investors and advisors to truly understand liquid alternatives (from the different strategies to the benefits) is a two-step challenge for the industry: there will be confusion about the strategies and they may not be adopted if the benefits aren’t deeply understood.
Liquid alternatives are not simply a new investment solution, they’re not even a new strategy. Rather, they’re a new asset class consisting of a new set of strategies.
It seems likely that liquid alternatives will be labelled “higher risk” and “ideal for more experienced investors.” Neither is 100% accurate.
Liquid alternatives have a wide range of strategies, some of which are less risky than a typical equity mutual fund. Other strategies could benefit less experienced investors if they allocate a smaller percentage of their broadly diversified portfolio to liquid alternatives.
The big opportunity: a new and/or bigger market
Investment managers can provide access to this asset class to every investor, helping them diversify their investments and better manage the risk-return profile of their portfolios.
We expect most of the major mutual fund and alternative investment managers to launch retail-friendly liquid alternative funds and ETFs in the coming years.
Mutual fund managers can expand into the alternative investment space using their brand recognition to help grow the liquid alternatives asset class. At the same time, alternative investment managers can enter the retail investment space using their experience and expertise as a key value proposition.
But offering liquid alternatives is not just about increasing assets under management. Investment managers can better engage their clients and prospects by taking an educational approach. This approach will help investment managers strengthen their brand because they will be providing value … not just products.
Given liquid alternatives is a relatively new asset class to many investors in the retail space, educating the retail audience about the language/terms, investment strategies, differentiators, etc. of this asset class will likely be key to widespread understanding and acceptance of liquid alternatives. It will also help position manufacturers that provide this information as leaders in the space.