Liquid alternatives

What are liquid alternatives?

Liquid alternative products, such as alternative mutual funds and ETFs, take alternative investment assets or strategies and put them into a familiar, liquid fund structure with a low minimum investment, ease of trading and stringent regulatory guidelines.

Traditionally, many people invest in stocks and bonds because they are liquid, which means there is an ample supply on the market, making them easy to buy and sell with little notice. Many alternative investments are not as liquid, because they often involve long locked-in contracts and high minimum investments. Therefore, a significant challenge when investing in some types of alternatives is illiquidity, which makes it difficult to trade on demand. Another challenge of alternatives is access, with some alternative assets rarely available on public markets. Liquid alternatives overcome these issues by packaging these alternative assets and strategies into easy-to-trade mutual funds and ETFs.

What are the advantages of liquid
alternative funds?

The advantages to retail investors of using a liquid alternative product, compared to traditional alternatives, include:  

  • An easier entry point in terms of the initial investment
  • Lower management fees
  • Transparency and reporting as demanded by regulation
  • Regulatory limits on the amount of total leverage employed and caps on the allocation to illiquid assets
  • The ability to move in and out of the investment with relative ease

Improvements to analytical and support technology, as well as a rising level of comfort and expertise in alternative investments, have allowed portfolio managers to dynamically re-balance holdings across a range of alternative assets and strategies as they seek reduced risk and enhanced returns. The use of a mutual fund structure assures investors that the liquid alternative product is properly described within a prospectus and subject to both regulatory approval and ongoing review. 

How liquid alternatives work

Liquid alternative mutual funds, under the recent regulatory changes, are subject to similar ongoing disclosure requirements as conventional mutual funds and other prospectus-qualified investment funds.

Narrow to broad focus

Liquid alternative funds come in many different varieties. As the Canadian liquid alternatives market expands, it will be important for investors, advisors, industry organizations and regulatory agencies to properly distinguish among the various approaches. 

Are liquid alternative funds suitable for you?

As liquid alternative funds become increasingly available to both advisors and investors, it is important to recognize that liquid alternatives may not be appropriate for all investors.