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Alternative investments are getting more focus from advisors over the last few years, and for good reason. They can offer greater diversification and uncorrelated income and growth potential, while aiming to smooth out the volatility that can arise from public equity and fixed income allocations.
Generally, alternatives include a broad range of private markets strategy and absolute return or hedged strategies, both stand-alone and in multi-strategy wrappers. While alternatives have been used widely among institutional investors, they’re poised to play an increasingly important role in investor portfolios. That’s due to a volatile, and potentially more muted, outlook for public markets.
Ash Lawrence, head of AGF Capital Partners.supplied
“People feel exceptionally fortunate for the equity market returns generated in recent years. But they’re now looking over their shoulders at that historical performance, wondering how long that will last and looking for another way to deliver diversification and reduce volatility,” says Ash Lawrence, head of AGF Capital Partners.
With that in mind, he believes alternatives should be of particular interest in a potentially uncertain investment environment.
Even as advisors have come to understand the benefits of alternatives, many are looking for insights into how to best incorporate them into client portfolios.
“Some family offices in Canada now have allocations for alternatives that you would traditionally see with large pension fund portfolios,” says Scott Radke, chief executive officer and co-chief investment officer of New Holland Capital (“New Holland”), a leading multi-asset alternative manager in New York.
Today, alternative allocations can exceed 50 per cent of portfolios of pension funds and family office portfolios, he adds. Yet, among the majority of high-net-worth Canadian investors and securities-licensed advisors, that exposure is significantly lower.
Some have none at all, and even those that have allocation, many are still materially lower than 10 per cent, on average. A recent report from research firm Investor Economics found that most advisors who use alternatives target between 10 per cent and 30 per cent of a client’s portfolio for these allocations.
To that end, many investors can consider more exposure to alternatives. While private credit and private equity have received most of the headlines of late, hedge fund strategies represent another subsector of alternatives that’s worth a closer look. That’s especially true if general market expectations are for a relatively volatile environment.
“Hedge funds are designed to add portfolio diversification, especially when it comes to tactical alpha strategies targeting very low correlation to broad equity or fixed income markets, often mitigating against systematic market risk,” Mr. Lawrence says.
Finding the right exposure
Getting diversified exposure has often proved challenging even for high-net-worth investors. That’s why AGF Capital Partners recently launched a unique new product to Canada’s hedge fund landscape.
AGF NHC Tactical Alpha Fund is a feeder fund, managed by AGF Investments Inc. It invests in a multi-strategy, multi-portfolio manager fund. This gives accredited investors access to New Holland’s decades of deep experience managing diversified hedge fund strategies for institutional investors.
Scott Radke, CEO and co-CIO of New Holland Capital.supplied
“We engage approximately 40 portfolio managers all in a single portfolio,” Mr. Radke says. “The emphasis is on less scalable, niche strategies that we believe offer better alpha generation that would be challenging for many investors to access otherwise. Additionally, each portfolio manager is an expert in their particular niche, providing specific and focused expertise in each of the strategies.”
New Holland manages the master fund, curating its portfolio with strategies from around the world. Its team tracks their performance and is able to make quick adjustments to allocations if market conditions change.
AGF NHC Tactical Alpha Fund offers the best of both worlds of New Holland and AGF Capital Partners. With New Holland, investors get the “intensity and entrepreneurship” of a boutique investment firm specializing in hedge funds, Mr. Radke says. Meanwhile, AGF provides the size, scope and expertise in the Canadian retail and high-net-worth channels to offer the fund to eligible Canadian investors.
These investors may be challenged to access more esoteric investment approaches, such as a commodities relative-value strategy. This is essentially an arbitrage strategy, in which a fund manager looks to exploit price differences that can arise in global commodities markets due to unique macroeconomic conditions. The strategy is designed to generate returns when bond and equity markets are being battered, as happened in 2022.
It’s just one of the dozens of strategies the fund has exposure to, all combined with an overarching goal of giving advisors and clients portfolio exposure that differs from other alternatives.
In strong equity markets such as the one experienced in 2024, AGF NHC Tactical Alpha Fund may not necessarily outperform, Mr. Lawrence notes. However, the strategy aims to be about one-third as volatile as a typical equity allocation.
“When coupled with a zero beta and low correlation to equity markets, this can result in an interesting complement to the existing assets in a portfolio that consists of long equities and credit securities,” Mr. Radke says.
A major drawdown in a portfolio can weigh on performance for an extended period of time, even as equity markets are expected to move higher in the short term. An allocation to a product that helps to minimize drawdowns can help to mitigate and shorten the performance drag they cause.
“With AGF NHC Tactical Alpha Fund, investors can access a portfolio deliberately built with minimal exposure to equity risk, offering a diversified portfolio of strategies that aims to perform across many environments,” Mr. Lawrence says. “It’s designed to be an all-weather strategy that we believe would really appeal to Canadian investors.”
About AGF Capital Partners
AGF Capital Partners is AGF’s multi-boutique alternatives business with diverse capabilities across both private assets and alternative strategies. Clients benefit from the specialized investment expertise of Affiliate Managers combined with the organizational support and breadth of resources of AGF Management Limited (AGF). With over 18 years average experience, AGF Capital Partners Affiliate Managers’ Kensington Capital Partners Limited, New Holland Capital, LLC and SAF Group manage approximately C$13.5 billion in alternative AUM and fee earning assets on behalf of institutional and retail clients. Affiliate Manager AUM may not be consolidated into AGF Management Limited’s reported AUM. US AUM converted FX rate at December 31, 2024 (1.44).
AGF Investments Inc. is a wholly-owned subsidiary of AGF Management Limited and conducts the management and advisory of mutual funds in Canada.
About New Holland Capital, LLC
New Holland Capital, LLC is an alternative investment manager that manages over US$6B in absolute return strategies for institutional clients. The firm seeks to generate alpha across a wide set of diversifying strategies, with a preference for niche, capacity constrained opportunities often with emerging portfolio managers. For more information visit https://newhollandcapital.com/.
Disclosures:
The views expressed in this article are those of the author and do not necessarily represent the opinions of AGF, its subsidiaries or any of its affiliated companies, funds or investment strategies.
This article is solely for information purposes and does not constitute an offer or solicitation of an offer or any advice or recommendation to purchase any securities or other financial instruments and may not be construed as such.
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