Liquid Alternatives for the Canadian Investor

30 October 2019 by National Bank
liquid alternatives Canadian inverstors

Rethinking risk diversification following a decade-long bull run has been on the minds of many investors. Gone are the days when investors could take solace in their diversified portfolios of stocks and bonds These traditionally uncorrelated assets are increasingly moving in tandem with one another, prompting the need for untraditional methods of diversification.  

Changing the investment landscape

What followed was an era fueled by equity markets reaching all-time highs at the expense of historically low interest rates. More recently, having shown up late to the party, market volatility has contributed to investors double-guessing their investment strategies.

After years of gains in traditional asset classes:




This result culminated in investors and their advisors recognizing the value of adding alternative investment strategies to help mitigate risk. The case for liquid alternatives made it evident that investors were seeking access to a structure that would have the benefits of alternative strategies, but also with the standards of proper regulation, ease of use, and transparency, enhancing downside protection.

Rising demand for liquid alternatives

In the years since the financial crisis, institutional investors and pension funds (often referred to as “smart money”) have recognized the need to diversify further. Many opted to allocate a portion of their portfolios towards non-traditional asset classes and alternative strategies. This was done to help mitigate market volatility while adding additional sources of potential returns.

This new category, once an exclusive space for institutional and sophisticated investors, has now been made accessible to Canadian investors seeking the same potential of added downside protection.

Exploring a broader opportunity set

Traditional portfolio construction has always dictated that maintaining diversification to achieve a resilient portfolio can weather a stormy market. Asset classes that are mutually uncorrelated is one way of achieving this.

Adding an uncorrelated asset class can reduce risk:



Liquid alternatives essentially combine the liquidity and transparency of traditional investment funds with investor-friendly regulations for investors. With improved diversification, increased downside protection and access to additional sources of returns, investors now have access to attractive risk-adjusted returns which allow them to broaden their opportunity set, independent of traditional stock and bond markets. 


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