Liquid alternative investments offer investors the best of two worlds: the flexibility and diversity of hedge funds; and the liquidity and accessibility of mutual funds and ETFs. Since their launch in Canada in 2019, the growth of liquid alternatives has been exponential, with total AUM now at $13 billion1.   As innovators in the liquid alternatives space, and as the largest provider of liquid alternatives in Canada, we have seen firsthand the need to help financial advisors broaden their understanding of this expanding asset class. CI Global Asset Management is committed to being a leader in the education of liquid alternatives. To kick this off, let’s look at two types of strategies that may fit within a portfolio.

Diversify away from traditional fixed-income risks with long/short credit

In this lower for longer interest rate environment, investors may be forced to reach for yield by investing in lower-quality securities (increasing default risk), adding duration (increasing interest-rate risk) or embracing additional liquidity risk in private markets. A rate-neutral long/short credit strategy may offer investors a safe haven from these risks within a liquid investment-grade tolerance. Key benefits include:

  • Enhanced portfolio diversification through reduced correlation to equities and traditional fixed income
  • A consistent return profile independent of the direction of interest rates; and
  • An attractive yield with a low risk profile.

Improve client outcomes with long/short equity

Long/short equity strategies are a natural fit for the equity portion of many investors’ portfolios, up to and including those with a low-medium risk tolerance. With flexibility to employ sophisticated tools like short-selling and derivatives, long/short equity strategies deliver the benefits of equity ownership with potential for lower volatility, lower correlation to broad equity markets, and better downside protection. For clients investing over the short or medium term, substituting a portion of a plain vanilla equity allocation into a long/short mandate may lead to better investment outcomes within their target holding period. A long/short equity allocation may also provide a smoother ride by delivering better risk management than a long-only equity position while generating a similar ‘end return.’

Alternatives in action

In the following example, we’ve demonstrated how a traditional global 60/40 portfolio is enhanced with a 20% alternatives sleeve comprised of 15% long/short equity and 5% long/short credit. The resulting portfolio offers improved returns (absolute and risk-adjusted), lower volatility and better downside protection.

HYPOTHETICAL PERFORMANCE AND FOR ILLUSTRATIVE PURPOSES ONLY*

 

Return

Standard

Deviation

Sharpe

Ratio

Sortino

Ratio

Worst

Month

Worst

Quarter

Max

Drawdown

Traditional 60/40

10.33 %

7.22

1.22

2.22

-3.35 %

-4.52 %

-6.53 %

Enhanced 60/40

11.20 %

6.47

1.48

2.98

-2.61 %

-2.70 %

-5.03 %

Source: Morningstar Research Inc. for the period 12/1/2018 – 3/31/2021. Global equities = MSCI World GR CAD, Global Bonds = Bloomberg Barclays Global Aggregate TR CAD, Global Long/Short Equity = CI Munro Alternative Global Growth Fund (Series F); Long/Short Credit = CI Lawrence Park Alternative Investment Grade Credit Fund (Series F)

1Source: CAASA as of February 28, 2021


CI Global Asset Management offers a comprehensive suite of liquid alternatives designed to improve investor outcomes. Visit our website for a full list of our liquid alternative investments.

Originally published in AIMA Canada Release: December 2020.


*The hypothetical performance assumes reinvestment of dividends and capital gains. All model entry and exit prices are based on the volume-weighted average price for the day orders are executed. Fund expenses, including management fees and other expenses, were deducted. Performance is calculated in CAD dollars. Unlike an actual performance record, simulated results do not represent actual performance and are generally prepared with the benefit of hindsight. In addition, hypothetical trading does not involve financial risk. There are frequently differences between simulated performance results and the actual results subsequently achieved by any particular fund. In addition, since trades have not actually been executed, simulated results cannot account for the impact of certain market risks such as lack of liquidity. There are numerous other factors related to the markets in general or the implementation of any specific investment strategy, which cannot be fully accounted for the in the preparation of simulated results and all of which can adversely affect actual results. No representation is being made that any person will or is likely to realize profits or losses similar to those presented above.