Of the comments received, most “were hugely supportive of the proposals and advocate[ed] going further,” said Michael Burns, chair of the Canadian branch of the Alternative Investment Management Association (AIMA), at a press conference last week.
But caution comes from the comment letter submitted by the Canadian Foundation for Advancement of Investor Rights (FAIR), which says the funds should be offered only with the implementation of a statutory best interest standard and clear proficiency requirements. FAIR also calls for more research into — among other things — investor experience with, and returns from, alternative investments.
Notwithstanding the possibility of a further comment period, the proposal could be in place by spring 2018, suggests AIMA Canada. As stated in the proposal, the amendments would come into force about three months after the final publication date, at which time all investors could take advantage of the funds.
Flood gates open
Right now, the alternatives world is relatively small, says AIMA, with hedge funds making up about $35 billion assets in Canada versus $1.5 trillion in public markets. And there are about 140 Canadian hedge fund managers versus thousands of long-only managers.
Although hedge funds typically use alternative strategies, their reputation — based on stereotypes — may make them a poor poster child for alts.
“We’re trying to get away from this concept of hedge funds,” said Burns. “Alternative funds” communicates a broader range of options, he says.
That range of options is highlighted in a Unigestion research paper on alternative risk premia and how to exploit them. The report says that, historically, net hedge fund returns have been calculated as the sum of market beta and alpha, minus fees.
But, in the last decade, research has shown that what was previously thought of as alpha is actually due to the existence of alternative risk premia, which has important implications for investors.
“While true alpha is still part of the hedge fund return equation and has various sources,” says the report, “investors are now presented with the opportunity of accessing alternative investment returns much more cheaply and efficiently through alternative risk premia.”
Similar to what happened with mutual funds, once the banks and brokers get access to alternative investments, “it’s a sea change,” said James Burron, COO of AIMA Canada, at the press conference, referring to expected asset growth.
And, with alternatives being subject to the same risk classification methodology as mutual funds, if an alternative strategy isn’t risky, “it’s not going to be branded as risky by the bank channel, so you’ll see much broader acceptance of publicly offered alternative strategies at the bank level,” said Burns.
He expects the first movers in the space to be mutual fund manufacturers, who will offer stand-alone products, allocation from existing funds into new products or will establish sub-advisory relationships with existing alternative fund managers. The latter will also offer product.
Advisors tune in
For advisors, educating themselves and clients about alts will be key. Just as the long space has, for example, value, growth and momentum strategies, alts have their strategies, such as market neutral and managed futures.
“Not all alternative funds are the same,” said Burns. “There are so many different strategies and asset classes that you have to take the time [to] understand the nuances of each one. Each one […] could have a place in a particular investor’s portfolio.” Further, ideal allocations to different strategies must be considered. Different strategies affect liquidity, for example.
Also understand risk in a portfolio, said Burns, which goes hand-in-hand with understanding strategy. For example, do certain market conditions make a strategy more risky? Active allocation may be required to move in and out of strategies.
And, with CRM2 in place, Burns noted investors won’t suffer from sticker shock, as may have occurred with mutual fund fee disclosure. (Methods for performance-fee calculations have to be disclosed in the simplified prospectus and are subject to a high-water mark.) For private alternative investments, he noted full disclosure of fees is already made in the offering memoranda.
In the proposal, CSA says it’s working with the MFDA to determine proficiency requirements for dealing reps.
Read the Unigestion paper on alternative risk premia here.