Assets under management in alternatives have increased significantly, but some firms remain cautious about the products.zhuweiyi49/iStockPhoto / Getty Images
Canadian investment dealers and their advisors are adding more alternative investments to client portfolios thanks to the introduction and growth in the number of “top-quality institutional products that have entered the Canadian market,” according to a recent report from Toronto-based Investor Economics, an ISS Market Intelligence business.
The report found that the Big Six banks’ brokerage divisions and other full-service investment dealers have increased their assets under management (AUM) in alternatives significantly since 2019. The full-service brokerage channel has seen a compound annual growth rate of 22 per cent in alternatives AUM during that period while the number of product options has increased 12 per cent annually.
Liquid alternative investment funds, which first became available in 2019 by prospectus instead of the traditional offering memorandums (OM) that were accessible only to accredited investors, were key drivers of that growth.
“Overall, we’ve seen an increased appetite and willingness to add all types of alts to product shelves,” says Vincent Linsley, associate director of Investor Economics, an ISS Market Intelligence business, in Toronto, and the report’s author, adding that this trend should continue.
Arthur Diochon, head of alternatives research at BMO Family Office in Oakville, Ont., says there were “very few options” in the alternatives space a decade ago.
“A lot of the large players in the U.S. weren’t even looking at Canada, and the liquidity was such that many products were only suitable for ultra-high-net-worth clients,” he says.
Major U.S. alt providers including KKR & Co. Inc. and Blackstone Inc. now see Canada as fertile ground for growth, Mr. Linsley notes.
“They’ve launched a lot of products and offer them in Canada, and the big [brokerage] firms are generally much more comfortable adding these.”
Mr. Diochon says BMO Family Office had seen growing use among its high-net-worth clients in the U.S., which helped inform its strategy for Canada.
“These are seen as just another tool in the toolbox clients should be able to access,” he adds. “We’re focused on ensuring the shelf is stocked adequately.”
Like other firms, BMO Family Office has beefed up its research team to vet these investments, particularly traditional OM alts.
Challenges remain, though, notably education among clients and advisors.
“Most accredited investors may have had access before, but even their advisors may not have engaged in those solutions” because of their unfamiliarity with these products, says Claire Van Wyk-Allan, managing director and head of Canada for the Alternative Investment Management Association (AIMA) in Toronto.
AIMA Canada is offering more educational resources as it sees rising demand for this type of support from advisors, especially after stocks and bonds fell in tandem in 2022.
“It’s a recognition by advisors that you increasingly need exposure to public and private markets, or you’re missing out,” she says.
Thane Stenner, senior portfolio manager and senior wealth advisor with Stenner Wealth Partners+ at Canaccord Genuity Wealth Management in Vancouver, has long recognized the benefits of alternatives for increasing diversification, de-correlation from stocks and bonds, and growth, all while reducing volatility.
Mr. Stenner notes that he and his team spend significant time and effort researching new products and monitoring current alternative positions for clients, whose net worth begins at $25-million.
Clients want “good returns and less volatility,” he says, noting that they generally give up liquidity in exchange.
Yet, liquid alts offer more flexibility, he says, particularly market-neutral and tactical public fixed income and equities strategies that use short-selling and modest leverage.
Traditional alternatives have evolved, too, with evergreen funds permitting monthly contributions and limited quarterly liquidity.
“Liquid alts and evergreen tend to be our focus now,” Mr. Stenner says.
His team tracks about 300 alt funds and owns about 25 of them, diversified across various classes and fund types and accounting for as much as 40 per cent of client portfolios. That’s more than double the allocation from a decade ago, Mr. Stenner says.
Although more advisors are using alternatives and more dealers are offering them, some wealth management firms are still weighing the benefits.
“We’re looking at them right now,” says Scott Sullivan, head of Canadian wealth management and advice solutions at Edward Jones.
The firm, which has US$2-trillion in client assets globally doesn’t offer even liquid alts for its more than 20,000 advisors, Canada included.
Mr. Sullivan notes Edward Jones is taking a cautious approach, ensuring alts have reasonable return expectations to help clients achieve their goals.
“That hasn’t always been clear in the past,” he says, with concern that some products are “flavours of the month” because of their strong, short-term performance but with elevated downside volatility risks that could lead to very dissatisfied clients.
Still, Mr. Sullivan says Edward Jones has about two dozen analysts researching liquid and OM products and is likely to offer them in 2025 first in the U.S. and then in Canada.
“We’re probably going to start with private debt, equity and real estate,” he says, noting their track record is more established.
Indeed, a recent study from the Chartered Alternative Investment Analyst Association found the net-of-fee annualized return of private equity from 2000 to 2023 by U.S. pension plans was 11 per cent, outperforming public equities by 480 basis points.
Advisors and wealth management firms recognize the potential. The Investor Economics study found a little more than half of Canadian advisors use them for clients, Mr. Linsley says.
“The feedback from the firms that we talked to is that alts are here to stay,” he says. “Their use is a lot more normalized.”