Key Takeaways
- • Karac Graham of Moyle Rowley Wealth Management Group at Wellington-Altus Private Wealth in Barrie, Ont., allocates 5 to 10 per cent of client portfolios to market-neutral strategies and says "every investor should have alts in their core holdings."
- • PICTON Investments' Rob Poole separates alternatives into "enhancers" (private equity, private credit) that can raise returns and "diversifiers" (infrastructure, real estate) that are less tied to consumer spending and the economic cycle.
- • Poole proposes a starting framework of 40 per cent equities, 30 per cent fixed income and 30 per cent alternatives, while Graham targets roughly 20 per cent in alternatives.
- • Rapid growth of liquid alternative funds and evergreen private-market vehicles in Canada has widened choice but introduced redemption-term and valuation risks that advisors say must be scrutinized.
- • Advisors caution that infrequently valued private assets may appear insulated from public market declines, and that fees must be justified by the portfolio benefit.
Summary
Advisors in Canada are increasingly layering alternative investments into core portfolios to reduce volatility and diversify away from public stocks and bonds, according to a Globe and Mail article. The case for alternatives strengthened after the simultaneous declines in equities and fixed income in 2022, which Rob Poole, co-head of equity strategies and portfolio management and trading at Toronto-based PICTON Investments, described as a rare but painful occurrence that spurred investor demand for additional sources of stability.
Alternatives span trading strategies, private market asset classes and direct exposure to commodities and precious metals. Poole divides them into two groups. Enhancers, such as private equity and private credit, may carry risk profiles similar to other portfolio holdings but can offer higher returns; private equity provides access to business growth and private credit can supplement income at a premium to public bonds. Poole cautions that both retain some connection to public market risk. Diversifiers, including infrastructure and real estate, generate cash flows from regulated revenue and rents and are less correlated with the economy. Kiara Graham's approach, as described by the article, emphasizes liquid strategies: he favors market-neutral strategies, which limit broad-market exposure through offsetting equity positions, and merger-arbitrage allocations linked to corporate transactions.
The article highlights new risks that accompany the growing menu of liquid alternative funds and evergreen private-market vehicles in Canada. Redemption terms vary widely; market-neutral holdings offer daily liquidity, while many evergreen private-market structures restrict withdrawals. Poole said investors with long-duration horizons, similar to pension funds, may accept more liquidity risk for additional enhancers, and noted that although some products are marketed as semi-liquid, "when you need liquidity, you may not always be able to get it."
Valuation is another concern. Privately held assets valued less frequently may appear insulated from public market declines even though their underlying businesses face similar pressures. Graham looks for cash flows that support valuations and asks whether valuations are updated independently. He also says fees require scrutiny, as clients may accept higher costs for risk reduction only if the portfolio benefit justifies the expense.
Alternatives span trading strategies, private market asset classes and direct exposure to commodities and precious metals. Poole divides them into two groups. Enhancers, such as private equity and private credit, may carry risk profiles similar to other portfolio holdings but can offer higher returns; private equity provides access to business growth and private credit can supplement income at a premium to public bonds. Poole cautions that both retain some connection to public market risk. Diversifiers, including infrastructure and real estate, generate cash flows from regulated revenue and rents and are less correlated with the economy. Kiara Graham's approach, as described by the article, emphasizes liquid strategies: he favors market-neutral strategies, which limit broad-market exposure through offsetting equity positions, and merger-arbitrage allocations linked to corporate transactions.
The article highlights new risks that accompany the growing menu of liquid alternative funds and evergreen private-market vehicles in Canada. Redemption terms vary widely; market-neutral holdings offer daily liquidity, while many evergreen private-market structures restrict withdrawals. Poole said investors with long-duration horizons, similar to pension funds, may accept more liquidity risk for additional enhancers, and noted that although some products are marketed as semi-liquid, "when you need liquidity, you may not always be able to get it."
Valuation is another concern. Privately held assets valued less frequently may appear insulated from public market declines even though their underlying businesses face similar pressures. Graham looks for cash flows that support valuations and asks whether valuations are updated independently. He also says fees require scrutiny, as clients may accept higher costs for risk reduction only if the portfolio benefit justifies the expense.
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