Most new liquid alternative funds are ‘relatively conservative’: DBRS

The Canadian asset management industry has expanded offerings of alternative investment funds, a sector whose future will depend on returns and ability to add value, says DBRS Inc. in a new report.

The rating agency reported that there have been 29 new liquid alternative (liquid alt) funds launched in Canada this year, in the wake of regulatory changes expanding firms’ ability to use alternative investment strategies — such as leverage, arbitrage and short selling — in products for retail investors.

The new regime has allowed fund manufacturers and distributors to expand their offerings, and to provide actively managed alternatives that are difficult to replicate with passive products.

Most of the new funds launched this year use long-short strategies that aim to provide investors with uncorrelated, positive returns, while guarding against downside risk, DBRS said.

There are also some funds using arbitrage strategies to enhance returns, it noted.

For the most part, the new liquid alt funds that debuted this year are “relatively conservative,” DBRS said, noting that that they are invested “primarily in high-quality, liquid investments.”

Additionally, it said that the relatively cautious approach taken by the Canadian Securities Administrators (CSA) to expand access to alternative strategies has helped to guard against excessive investor risks.

DBRS said analysts estimate the potential market for liquid alt funds is between $20 billion and $100 billion in assets under management (AUM).

At this point, though, the new funds remain relatively small.

“Continued expansion in this new fund space will depend on the future performance of the liquid alt funds,” it said.

“Success will depend on whether the additional complexity and higher fees of these new funds generate the benefits that retail investors expect,” it concluded.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.