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TMX POV - The New Liquid-Alt Era

March 1, 2019

By Graham MacKenzie, Head, ETFs and Structured Product

As of January 3rd liquid alternatives are here, but what does this all mean? Will this new asset class make inroads into Canadian retail portfolios?

Liquid alternatives by definition are alternative investment strategies like hedge funds that are available in a more liquid format such as a mutual fund or an ETF. Prior to the recent changes to Canadian Securities Administrators' National Instrument 81-102, hedge funds and alike were pretty much exclusively available to high net worth and institutional investors.

While it's easy to expect an initial wave of investment products and interest, is it realistic to expect a significant amount of dollars to flow into them? In the US, retail focused liquid alternative products didn't really gain much traction until investors looked for diversification in the aftermath of the financial crisis. Demand for the products ultimately stalled when the market regained its footing and the bull market returned.

Today, as investors capitulate and the fears of market reversals grow, perhaps demand for uncorrelated products will gain favour in Canada and interest will return to the US. The challenge the new "industry" faces is not only the investors' need to educate themselves about these products and how they are different, but also how conventional asset managers and traditional hedge funds will create products that allow for daily redemption. The hurdles asset managers face will be to create products that are liquid to investors. Make no mistake that many existing alternative assets that have monthly and quarterly redemption mechanisms don't readily translate into products that allow for daily redemptions. Many asset managers who have existing products will need to tailor these products to meet the needs of new investors and learn to navigate a new sales channel.

Some have pointed out that this new investment vehicle may be another strike against the mutual fund industry but that perspective is probably short sighted when you consider that mutual fund managers (and ETF providers) will likely have a step up on the incumbent hedge funds when you consider their existing robust compliance policies, dedicated sales force and breadth of retail distribution.

Although the changes to National Instrument 81-102 are new, the asset managers have been expecting and anticipating this opportunity for some time. It will be exciting to see what products will make it to market but it is important not to quickly pass judgement on the success of this emerging asset class, after all, Rome wasn't built in one day.

Looking forward to hearing your feedback and thoughts.

This article is provided for information purposes only and is not intended to provide any type of advice. This article is not an endorsement or recommendation of any specific securities in any industry nor is it an invitation to purchase securities listed on TSX Venture Exchange or Toronto Stock Exchange. Listing on TSX Venture Exchange or Toronto Stock Exchange does not guarantee the future performance of a security or an issuer.