The new era of liquid alts is a potential game-changer for Canadian retail investors, according to a portfolio manager.
Regulators are fine-tuning its rules after the CSA’s proposed amendments made the investment vehicle available to all.
Nelson Arruda, vice president, Mackenzie Asset Allocation Team, said that this development, while it seems like an overnight phenomenon, is actually about five years in the making and will offer investors real choice in the alternative asset class.
He said: “Right now if an investor has a mid-to-high level of required returns for their retirement or whatever that may be, they had to invest heavily in an equity portfolio – it’s the only choice they really had; bonds just offered too little volatility.”
He added: “[Liquid alt] strategies and their benefits are seen by institutions globally and they are ways to get diversification. In a lot of cases, a retail investor getting into private equity takes a large amount of capital.
“These targets, because they are trading on public markets, are open to investors on lower wealth sizes, which gives them an opportunity of diversification which major players are doing.”
In a speech at the WAIS 2018 Canada summit in Toronto on Sept. 13, Arruda emphasized the benefits of diversified strategies within liquid alts, explaining how vital that is to reducing risk in a variety of market conditions.
He highlighted five different approaches that can be used in tandem: equity long/short; non-traditional bonds (niche parts of credit, for example); managed futures (trend-based strategy); market neutral; and multi-currency.
Arruda said: “Under the news rules these strategies become much more feasible. We can now implement any of these to the risk levels that are appropriate to a retail investor.
“The issue is that all of these strategies bring different characteristics, so if we look at the performance from 2012 to 2017, your winners and losers are very different. Really the driver is that, because they all bring different characteristics, they work in different market environments.”
From 2008 to 2017, Arruda compared a typical 60-40 retail investment fund (70% MSCI world, 30% TSX on the equity side) to one where 20% across both asset classes is dedicated to liquid alts.
The former produced 6.2% returns with risk at 10%, while the latter upped returns to 7% and, critically, reduced risk to 8.8%, which Arruda said was the real “big story”.
He said: “This is something for the retail investor that would really smooth out returns because their time horizon is much lower and would make a significant impact.”
He added that the diversification alternatives can bring is a boon to retail investors, especially when markets get more choppy and even crash.
He said: “If you can add two things that have similar returns but are not uncorrelated the benefits are huge. If it can bring their volatility down and that low correlation [occurs] when a market crashes and they can’t wait five years for a market to recover, then that would be the game-changer.”
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