These mutual funds will be able to adopt investment strategies and invest
in asset classes that were previously prohibited under the NI 81-102
regulation. Alternative funds are also known as “liquid alternatives”
because they offer access to alternative strategies through investment
vehicles with daily liquidity, provided through redemptions at net asset
value for mutual funds or by trading on an exchange for ETFs.
Although this represents new territory for Canada, several other
jurisdictions have had access to these products for quite some time, most
notably the United States and European Union. First authorized in the 1940 Investment Companies Act in the U.S., the E.U. added a
comparable distinction to the UCITS directive in 2002. Despite their legal
creation in both jurisdictions, the funds did not really begin to gain
popularity until after the 2008 financial crisis. Since then, combined
European and United States assets under management (AUM) in this class has
exploded from C$174 billion in 2008 to over C$950B in the first quarter of
Not only have the European Union and United States experienced rapid growth
in alternative funds’ AUM but also in the range of products offered. In
Europe, for example, Alix Capital provides the UCITS Alternative Indices,
which track a set of 13 broad strategies in the Alternative UCTIS market.
Stateside, Strategic Insights maintains 22 distinct categories for
alternative funds, while Morningstar supports 31 hedge fund categories.
Especially in the U.S., the categories represent a wide variety of
strategies with a high degree of granularity that seems unlikely to
translate to the Canadian market, at least in the immediate future.
Regardless, if these numbers are any indication, Alternative funds have the
potential to become exceptionally popular in Canada and will offer retail
investors a wide variety of funds.
A whole new world
The strategies used by Alternative funds will share many similarities with
those of Canadian hedge funds, so they are a good place to look for what
may become available in the Canadian market. The table below is an overview
of strategies developed from existing Fundata hedge fund categories:
For simplicity, the strategies are very broadly classified as “directional”
or “non-directional.” Directional strategies involve a net long or short
exposure and seek to profit from an anticipated change in price.
Non-directional strategies, on the other hand, attempt to capture profit
from one or more specific value factors while reducing or eliminating
exposure to others.
The list is a brief overview of possibilities and is by no means
exhaustive. Strategies in either style can be employed using a variety of
assets such as equities, fixed income, currencies, volatility or
derivatives, in addition to being further customized or combined with one
Some of these investment styles will already be familiar to the average
Canadian investor. Leveraged and Inverse ETFs are readily available to
Canadians from exchanges on both sides of the border. While it is unclear
how much demand there will be for some of the more esoteric fund types, it
is likely that the appeal of exposure to new asset classes with low
correlation to traditional ones will see their eventual introduction.
Alternative funds have been available in other jurisdictions for years but
whether they will enjoy the same popularity in Canada as they have with
investors in Europe and the United States remains to be seen. What is
clear, however, is that the changes coming later this year will forever
alter the Canadian investment landscape.
Despite greater complexity, investors are sure to benefit from a wider
range of investment options and the opening of opportunities that once were
exclusively available to high net worth and institutional investors.
* Source: Franklin Templeton Investments, Lyxor Asset Management
John Krisko, CFA, BBA, is Manager, Analytics & Data, at Fundata Canada Inc., a leading
source for investment fund information. He is also Vice-Chair of the
Canadian Investment Funds Standards Committee (CIFSC).
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