As an asset class, alternative investments have demonstrated their potential to diversify traditional portfolios, reduce risk and enhance returns in all market conditions.
Many investors rely on traditional asset classes like stocks and bonds to help them meet their investment goals. However, the global financial crisis of 2008-2009 demonstrated that many traditional asset classes can, at times, all move together in one direction – down. Today, with stocks continuing to be vulnerable to volatility and a decades-long bull market in bonds possibly coming to an end, investors are increasingly looking to alternative asset classes to help diversify and enhance or protect returns. For many, alternative investments have become an important component of a well-diversified portfolio.
Historically, alternative investment strategies have demonstrated that they can complement and diversify more traditional investments in various market conditions, offering largely uncorrelated returns to traditional stock and bond market movements. Examples of alternative investments include venture capital, private equity, hedge funds, real estate, investment trusts and commodities.
Most traditional investment strategies are vulnerable to suffering significant losses during times of market crises. The key to finding true diversification is in accessing an investment that can offer the potential to deliver performance during such negative periods. “Crisis alpha” refers to investment strategies that offer the potential to deliver positive returns during times of financial stress.
Who Uses Alternative Investments?
Large institutional and accredited high-net-worth investors have long used alternative investments to manage risk and enhance performance. Today, many large institutional investors have allocations to alternative investments, including:
• Yale Endowment Fund: Includes absolute returns, leveraged buyouts, and venture capital
• OMERS: Private equity, infrastructure and real estate
• Harvard Endowment Fund: Private equity, absolute return, real estate and natural resources
• Ontario Teachers Pension Plan: Includes natural resources, real estate, infrastructure and absolute return
• CALPERs: Includes private equity, real assets, real estate and forestland
An Important Component of a Well-Diversified Portfolio
“Correlation” refers to a method of measuring the degree to which two investments move in relation to each other. A perfect positive correlation (expressed as “1”) means that as one investment gains or loses value, the compared investment moves in the same direction. A perfect negative correlation (expressed as “-1”) means that the compared securities move in completely opposite directions. A zero correlation implies no relationship whatsoever.
The chart below provides an illustrative example of the correlations between different categories of investments – including those from the alternative category.
|Category||Index Name||MSDIBHFI||DEX||S&P 500®||AMFERI||DBCRUSI|
|Morningstar Broad Hedge
|Bond||DEX Universe Bond Index||0.1325||1.0000||-0.5560||0.0870||-0.0131|
|Equity||S&P 500® Index||0.6269||-0.5560||1.0000||-0.1533||0.1932|
|Auspice Managed Futures
Excess Return Index
|Deutsche Bank Currency
Source: Bloomberg, between December 31, 2002 and December 31, 2016. The historical performance of the indicies are shown for illustrative purposes only. It is not meant to forecast, imply or guarantee the future correlation of any particular investment or index, which will vary. The correlations results of the Auspice Managed Futures Excess Return Index prior to its inception (11/17/2010) are hypothetical, back-tested daily total returns.
Alternative Investments Meet ETFs
Historically, alternative investments have been offered as high-cost strategies not easily accessible to every investor. They were often restricted to sophisticated institutional investors or to accredited high-net-worth investors who meet large minimum capital requirements – in some cases, millions of dollars.
Moreover, many alternative investment funds are relatively illiquid, with long capital lock-up periods or limited purchase/redemption windows. Others lack transparency, using “black box” trading strategies leaving investors guessing at how much risk they are actually taking on. Horizons ETFs has made it easy for all investors, regardless of portfolio size or experience, to gain low-cost exposure to this asset class through highly liquid, transparent ETFs.
Our suite of Alternative Investment ETFs makes it possible for every investor, regardless of experience or portfolio size, to access alternative strategies.
Key benefits of using an ETF to gain exposure to Alternative Investments:
• Low cost
• Highly liquid and transparent investments
• Exchange traded
• No minimum investment
• No minimum holding period
The Horizons Suite of Alternative Investment ETFs
Seeks to deliver long-term capital appreciation in all market cycles by tactically allocating its exposure amongst equities, fixed income, commodities and currencies during periods that have historically demonstrated seasonal trends.
• Seasonal rotation involves investing in the market at the times of the year when it typically does well or investing in sectors when they typically outperform the broad market
• Historically low correlation to broad equity markets
• Management fee: 0.75%*
• Investment Manager: Horizons ETFs Management (Canada) Inc
Seeks to generate positive absolute returns through long and short exposure to selected global currencies. HARC will generally hold Canadian short-term fixed-income securities and will primarily use derivative instruments to gain its exposure to selected global currencies.
• The only long/short global currency ETF in Canada: HARC gives investors both long- and short-position access to the world’s largest securities market, paired with the expertise of a world-class currency management team
• Non-correlated returns: Currency returns tend to be driven by factors that are distinct from those of traditional asset classes
• Management fee: 0.85%*
• Sub-advisor: CIBC Asset Management Inc.
Seeks to provide positive absolute returns with low volatility over a market cycle regardless of market conditions or general market direction. The ETF will tactically take long and short positions in North American and global debt instruments and derivatives across the credit spectrum. In respect of the Dividend Series Shares, the ETF will also seek to provide consistent income.
• Having an active fixed income strategy that has the flexibility to “go anywhere” to find investment opportunities might be more important than ever before.
• HARB will have the full flexibility to tactically change the duration, credit and FX exposures to seek to generate positive risk-adjusted returns with reduced volatility and negative correlation to other asset classes
• Management fee: 0.95%*
• Sub-advisor: DMAT Capital Management Inc.
Seeks long-term capital appreciation by investing, directly or indirectly, in major global asset classes including but not limited to equity indexes, fixed income indexes, interest rates, commodities, and currencies.
• Adaptive asset allocation is a globally diversified strategy that combines advanced diversification, systematic long/short global macro, and dynamic tail protection to provide investors with an all-weather investment solution.
• HRAA invests in a globally diversified portfolio that seeks to generate positive returns while targeting an average annualized volatility level at or below 12%, with very low correlation to broader equity and fixed income markets.
• Management fee: 0.85%*
• Sub-advisor: ReSolve Asset Management Inc.
Seeks to replicate, to the extent possible and net of expenses, the performance of an index that seeks to provide exposure to investments in cap-and-trade carbon allowances.
• Currently, the ETF seeks to replicate the performance of the Horizons Carbon Credits Rolling Futures Index (Excess Return), net of expenses.
• Carbon credits can provide unique exposure to an asset class that historically has low correlation to equity markets and is designed explicitly as a financial tool to help reduce global carbon emissions.
• Management fee: 0.75%*
*Plus applicable sales taxes.