Liquid Alts – The Long and the Short

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*

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.

IMPORTANT DISCLAIMERS

Commissions, trailing commissions, management fees and expenses all may be associated with an investment in mutual funds and exchange-traded funds (ETFs). Please read the prospectus before investing. Important information about mutual funds and ETFs is contained in their respective prospectus. Mutual funds and ETFs are not guaranteed; their values change frequently and past performance may not be repeated. You will usually pay brokerage fees to your dealer if you purchase or sell units of an ETF on recognized Canadian exchanges. If the units are purchased or sold on these Canadian exchanges, investors may pay more than the current net asset value when buying units of the ETF and may receive less than the current net asset value when selling them.

This document is provided as a general source of information and should not be considered personal, legal, accounting, tax or investment advice, or an offer or a solicitation to buy or sell securities. Every effort has been made to ensure that the material contained in this document is accurate at the time of publication. Market conditions may change which may impact the information contained in this document. All charts and illustrations in this document are for illustrative purposes only. They are not intended to predict or project investment results. Individuals should seek the advice of professionals, as appropriate, regarding any particular investment. Investors should consult their professional advisors prior to implementing any changes to their investment strategies.

Certain statements contained in this communication are based in whole or in part on information provided by third parties and CI Global Asset Management has taken reasonable steps to ensure their accuracy. Market conditions may change which may impact the information contained in this document.

Certain statements in this document are forward-looking. Forward-looking statements (“FLS”) are statements that are predictive in nature, depend upon or refer to future events or conditions, or that include words such as “may,” “will,” “should,” “could,” “expect,” “anticipate,” “intend,” “plan,” “believe,” or “estimate,” or other similar expressions. Statements that look forward in time or include anything other than historical information are subject to risks and uncertainties, and actual results, actions or events could differ materially from those set forth in the FLS. FLS are not guarantees of future performance and are by their nature based on numerous assumptions. Although the FLS contained herein are based upon what CI Investments Inc. and the portfolio manager believe to be reasonable assumptions, neither CI Investments Inc. nor the portfolio manager can assure that actual results will be consistent with these FLS. The reader is cautioned to consider the FLS carefully and not to place undue reliance on FLS. Unless required by applicable law, it is not undertaken, and specifically disclaimed that there is any intention or obligation to update or revise FLS, whether as a result of new information, future events or otherwise.

Lawrence Park Asset Management Ltd. is the portfolio subadvisor to the CI Lawrence Park Alternative Investment Grade Credit Fund offered and managed by CI Global Asset Management. CI Global Asset Management is the portfolio manager to the Munro Alternative Global Growth Fund and Munro Partners is the portfolio subadvisor to the fund. CI GAM is responsible for the investment advice provided by the portfolio subadvisors.

The CI Lawrence Park Alternative Investment Grade Credit Fund and the Munro Alternative Global Growth Fund are alternative funds. They have the ability to invest in asset classes or use investment strategies that are not permitted for conventional mutual funds. The specific strategies that differentiate these funds from conventional mutual funds include increased use of derivatives for hedging and non-hedging purposes; increased ability to sell securities short; and the ability to borrow cash to use for investment purposes. While these strategies will be used in accordance with the funds’ investment objectives and strategies, during certain market conditions they may accelerate the pace at which your investment decreases in value.

CI Global Asset Management is a registered business name of CI Investments Inc.

©CI Investments Inc. 2021.  All rights reserved. 

Published May 6, 2021