The Case for Alternative Strategies
For investors interested in liquid alternative solutions, opportunities in Canada are steadily growing.
Conventional investment wisdom holds that the low correlation between equities and fixed income makes them ideal counterparts within a portfolio; but what happens when that relationship no longer holds? Over the past three years, the relationship between the equities and bonds has been highly positive – indicating that the inverse relationship that should be present – isn’t there at this immediate juncture. For investors, now is an opportune time to consider alternative strategies and the benefits they can provide for one‘s portfolio.
Examining the Alternatives Landscape
Alternative investments are generally characterized as investments that are not long positions in equities or fixed income, but that is often a simplistic definition. In truth, alternative investments cover a wide range of both liquid and illiquid offerings that can be performance additives to one’s portfolio, while also offsetting the inherent risk of traditional investment; given their comparatively lower correlation to equities and fixed income.
Alternative investments generally fall into two categories, alternative assets and alternative strategies. While the former may be more familiar to investors through either direct ownership (i.e., owning a rental property) or an investment vehicle (i.e., REIT), the latter provides investors with a much broader opportunity set of investment strategies and specialties that can be included within their existing portfolio of traditional assets.
Accessing Alternative Strategies through Alternative ETFs
Alternative strategies provide investors with the opportunity to participate in novel and sophisticated investment strategies that are focused on achieving specific return outcomes, regardless of the market environment. As observed in the preceding illustration, Alternative Strategies can be bifurcated into two groups, liquid assets and illiquid strategies. For liquid assets, alternative ETFs provide investors with the ability to access alternative strategies via unitized investment solutions; thus, allowing them to integrate these solutions within their existing portfolio of investment instruments.
A look at performance
With the Bank of Canada recently moving to hold the policy rate at five percent – while keeping the door open to more rate hikes – by all indications, the ‘higher for longer’ interest rate environment is here to stay; against the backdrop of a macroeconomic environment that is being influenced by exogenous events that are having wide implication on global markets. With the performance of the broader Canadian equity market turning negative after July 2023, examining how alternative assets could be additive to one’s portfolio is worth consideration.
For investors interested in liquid alternative solutions, the opportunity set in Canada is steadily growing, providing individuals with the opportunity to gain exposure to investment strategies that can minimize overall portfolio risk and be an additive to overall performance. The following chart provides an illustrative look at alternative ETFs that have a distinct value proposition and have exhibited strong performance on a year-to-date and 1-year basis.
The Accelerate Absolute Return Hedge Fund (Ticker: HDGE) is a quantitative long-short equity hedge fund that seeks to achieve attractive risk-adjusted returns with low correlation to the broad equity markets. HDGE utilizes a systematic, proprietary multi-factor model to sort and rank all liquid North American stocks based on five principal factors: Value, Quality, Price Momentum, Operating Momentum, and Trend.
The fund goes long a portfolio of the highest expected return stocks selected from the top decile ranking from the multi-factor model while going short a portfolio of the lowest expected return stocks selected from the bottom decile ranking. The portfolio is rebalanced monthly.
The Picton Fortified Active Extension Alternative Fund (Ticker: PFAE) utilizes a long/short strategy in an actively managed portfolio comprised primarily of Canadian equity securities, whereas the Picton Mahoney Fortified Market Neutral Alternative Fund (Ticker: PFMN) employs a market-neutral strategy, ensuring that the portfolio profits from mispriced securities by pairing long and short positions in issuers in the same or an adjacent sector.
Finally, the CI Munro Alternative Global Growth Fund (Ticker: CMAG) is a long-short global equity portfolio that provides exposure to global growth equities over the medium-to-long term, benefiting from both the winning and losing stock positions of sustainable growth trends that are underappreciated and mispriced by the market.
Please note this article is for information purposes only and does not in any way constitute investment advice. It is essential that you seek advice from a registered financial professional prior to making any investment decision.
