Market Insights

What are alternatives and do they have a place in your portfolio?

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Alternative investments are those other than traditional investments such as stocks, bonds or cash. Some of the more common alternative investments strategies include:

  • REIT’s (real estate investment trusts):
    A real estate investment trust (REIT) is a real estate company that offers common shares to the public. Rather than investing directly in a single property, REIT’s typically hold dozens of commercial properties, including office buildings or exposure to real estate sectors such as seniors homes for example. REIT’s offer tax benefits, a portion of the distribution from Canadian REITs is a return of capital, which is not taxed.
  • Hedge Funds:
    A hedge fund has some similarities to a mutual fund, but they are typically structured differently and have access to a broad range of investment strategies. They are open to a limited range of investors and permitted by regulators to undertake a wider range of investment and trading activities than other investment funds.

    The term “hedge fund” has come to be applied to many funds that do not actually hedge their investments, and in particular to funds using short selling and other “hedging” methods to increase rather than reduce risk, with the expectation of increasing returns.

  • Private equity:
    Private equity refers to an asset class consisting of equity and/or debt securities in companies that are not publicly traded on a stock exchange. The fundamental reason for investing in private equity is to improve the risk and reward characteristics of an investment portfolio. Investing in private equity offers the investor the opportunity to generate higher absolute returns whilst improving portfolio diversification.
  • Venture capital:
    Venture capital is money provided to seed, early-stage, emerging and emerging growth companies. The venture capital funds invest in companies in exchange for equity ownership.
  • Wine:
    The wine industry’s growth has been remarkable. In Canada you can buy high quality bottles of wine and store them with the intention to sell later. This takes a lot of money, space and careful timing. An alternative is to buy a wine investment fund. Toronto-based Accilent Capital Management runs one or you can buy stocks in one of Canada’s many wine companies.
  • Art and antiques:
    Most of us have dabbled in this when buying décor and furniture for our homes, but few of us have made money. To successfully invest in antiques and art, you typically should have an interest in them or better still consult and /or partner with experts.

 

This largely unknown sector of alternative investments is growing rapidly for a variety of reasons, but primarily the ability offered to access good investments that are largely uncorrelated to traditional stock and bond markets. In fact hedge funds have benefited wealthy and institutional investment portfolios for many years with total portfolio exposure as high as 30 & 40%, so why not individual investors? Regulations have limited access given the many complex structures and potential risk although many options may actually reduce risk and certainly provide diversification.

With the mature S&P 500 bull market, portfolio managers are looking to supplement portfolios with alternative investments for long-term growth.

Bond markets also have elevated risk given the prospect of rising interest rates. This would suggest lowering bond exposure in favor of investments not subject to this risk such as multi-strategy hedge funds, real estate and private equity. These alternatives have historically produced returns that don’t correlate to traditional stock and bond markets and this added diversification will enable less volatile portfolios that should also deliver solid growth.

TriDelta’s investment product lineup includes a hedge fund, the TriDelta High Income Balanced Fund, which was launched in late 2013. Our hedge fund was however only available to ‘accredited investors’ until recently when regulations in Ontario and other Canadian provinces were amended.

At TriDelta our view is that new investment asset classes are always worth reviewing. If we find something that we are comfortable with, we will incorporate it into our overall recommendations. Now that regulatory changes have come about we’re also able to offer some of these solutions to non-accredited investors as well.

Strategies we have researched and analyzed include real estate funds, mortgages, business lending and factoring.

One common theme to alternative investments is that they often have low correlations to traditional investments such as stocks and bonds. This benefits portfolios by increasing diversification. Research has revealed that many large institutional funds such as pensions and private endowments have begun to allocate meaningful amounts of their portfolios to alternative investments such as hedge funds.

Alternative investments includes a vast category of specialist investment solutions and many we feel are simply not appropriate for the average investor. There are however a few very interesting solutions that deliver some unique advantages and better still are largely uncorrelated to traditional stock and bond investments.

Investments in real estate, mortgages, hedge funds, infrastructure, private debt and equity, and the like, continue to grow as a percentage of overall assets for some of the biggest pension funds. They comprise of over 30% of the overall portfolio at pension plans, such as the Ontario Teacher’s Plan (OTTP), Harvard Endowment Fund and the Canadian Pension Plan Investment Board (CPPIB), which manages the funds for CPP payments.

At TriDelta we spend much time reviewing market offerings and TIC (TriDelta Investment Counsel) works with a select group of alternative investment managers to provide similar benefits to our clients.

Alternative investments make up over 40% of US university endowment portfolios
education_alternative_figure1
Source: http://www.iasg.com/articles/education/alternative-investments
 

The reasons for their growth are that these investments often provide:

  • a more predictable income stream
  • less volatility
  • reduce risk in your investment portfolios.
 
What are the main benefits to hedge fund investment?
education_alternative_figure2
Source: http://www.iasg.com/articles/education/alternative-investments

 

Canadian high net worth portfolios, endowments and pension funds have also embraced alternative investment in recent years.

 

‘Ontario Teacher’s Pension plan asset allocation’ 32% Real assets and ‘alternative’ solutions; 35% Equities & 33% Fixed Income.
otpp
Source: www.otpp.com/investments/asset-groups

 

At TriDelta we believe select alternative investments play a key role in delivering more predictable and consistent returns for many of our clients.

 

Anton Tucker
Written By:
Anton Tucker, CFP, FMA, CIM, FCSI
Executive VP and Portfolio Manager
anton@tridelta.ca
(905) 330-7448

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