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In the rich history of Canada’s investment industry, the current era stands distinctly apart. Between technological, financial and regulatory innovation, the pace of change is unprecedented. Within a matter of years, entirely new investment ecosystems have emerged, bringing with them opportunities and risks for financial advisors.  

Chief among these innovations is the growing accessibility of alternative investments, until recently the purview of institutional and high-net-worth investors.  

The gap began to narrow in the mid-2010s. By 2019, the Canadian Securities Administrators finalized the liquid alts framework, enabling more Canadian investors to participate in hedge fund strategies. In 2021, we saw the introduction of the first Canadian cryptocurrency ETF. And in the last few years, we have seen a strong trend towards private market investments by financial advisors and their clients.  

These developments represent progress. However, participating in the alternative investments arena is not without its challenges given the complexity of these investments, generally lower levels of transparency and the potential for adverse investment outcomes.  

This column aims to assist financial advisors in navigating the alternative investments ecosystem by sharing facts, insights and guidance. Our goal is to unpack the risks and potential benefits, and explore a variety of investment opportunities.  

Before diving into the key considerations associated with investing in alternatives, it’s helpful to reiterate some fundamental truths.  

First, alternative investments are heterogenous and capable of producing dramatically different risk and return outcomes. Second, because of the heterogeneity, investing in alternatives is more about identifying vetted, quality opportunities than simply having exposure to the space. And third, due to the illiquid nature of most alternative investments, they are not for everybody and require careful, individualized client suitability assessments. 

US$20 trillion plus 

Globally, the alternative investments landscape accounts for more than US$20 trillion in assets under management, according to the Chartered Alternative Investment Analyst (CAIA) Association. That represents approximately 15% of all investment assets globally.  

It is widely expected that over the next decade, the space will continue to expand as more investor capital flows in, particularly as the private wealth channel begins to come online. Within alternative investments, private markets represent the lion’s share of assets with a dominant position held by global private equity.  

Historically, investors have allocated into alternatives to access diversification, differentiated return streams that enhance overall portfolio returns and income streams that enhance overall portfolio yield.  

Put more simply, investors turn to alternatives to enhance their portfolio returns while managing and minimizing the risks involved in achieving those returns. 

Within alternative investments, there are a variety of asset classes and strategies — each of which plays a different role in an investor’s portfolio. For example, private equity, the less liquid cousin of public equity, is typically called upon for its return enhancing prowess.  

According to data from Preqin, as of Sept. 30, 2024, private equity (excluding venture capital) generated a 10-year annualized, time-weighted return of 13.98%. This compares to an 11.3% return for the S&P 500 over the same period.  

Private credit, another rapidly growing alternative investments asset class, is typically utilized for income enhancement purposes and usually sits beside public fixed income in investor portfolios.  

Real assets, which include natural resources, infrastructure and real estate, are often relied upon for diversification, inflation protection and income production. They complement higher risk exposures within investor portfolios.  

For financial advisors evaluating alternative investments, it’s equally important to understand the unique risks the space contains. Within private markets, liquidity risk is a key consideration that must be incorporated into any investment decision. The vast majority of private market investment opportunities cannot be bought and sold on demand.  

Operational and governance risks are also key considerations. Missteps can lead to adverse consequences, irrespective of the opportunity’s investment merit. Financial advisors committed to investing in the alternatives arena may wish to consider taking additional courses or partnering with a specialized service provider to improve their odds of generating higher quality investment outcomes.

Nimar Bangash is the cofounder & CEO of Obsiido. He has spent 15 years on Bay Street researching, developing and investing in traditional and non-traditional investment strategies, and is the host of The Alternative Reality Podcast.