5 things you need to know before investing in Alternative Strategies
1) Is the firm and managers registered with the various provincial security regulators?
This is very important. Once you are registered as an investment fund manager and portfolio manager, a high standard must be followed when reporting to the regulators & investors. This can include quarterly reporting on all activities of the firm and its members, having your marketing material in line with industry standards and evaluating all your assets quarterly.
2) Who can invest in alternative strategies?
Before you invest in any strategy, you should always consult with a registered investment advisor to ensure alternatives are a suitable investment for your portfolio, investment objectives and risk tolerance. Not all alternatives are created equally. In some cases, the investor must be accredited. Until recently, it was difficult for the average investor to access alternative solutions. Currently, in most provinces, you can invest as much as $10,000 if you do not meet the definition of an eligible investor. However, many investors meet the eligible investor guidelines and can invest up to 100,000 per 12-month period, if they receive advice from a qualified investment advisor. Alternative investments can help with several parts of your portfolio, from lowering volatility, to enhancing yield and returns. In fact, the Canadian Pension Plan (CPP) has approximately 40% of their portfolio allocated to alternative strategies. This is up considerably from the 4% allocation just over a decade ago.
3) Are annual audited financial statements necessary?
Private companies can sometimes be hard to evaluate. Unlike public markets, these companies can choose not to share vital information with investors. This doesn’t necessarily make private companies a higher risk, but require a vigorous due diligence process when evaluating their firm. Completing annual audits with a reputable firm allows the company, with the help of the auditors, to place a fair market value on the assets and give the most accurate account of the value of the portfolio in order to achieve a fair Net Asset Value (NAV) for investors. More important than just NAV, audited financials ensure investors know where their money is being invested.
4) Do alternative investments have a higher risk profile than traditional public markets?
Risk is usually defined by investors as performance. The better the performance, the less perceived risk the underlying investment has. This is not accurate. All asset classes, including GIC’s, have a level of risk associated with them, and sometimes that risk is higher or lower depending on where we are in the investment cycle. Just because we use the term alternative, it doesn’t mean that it is riskier or less risky than something else in the traditional markets. Most investors assume that the alternative space is risky because they are not familiar with private options, lack of access to private investments at the retail level and the myths and preconceived notions about private investments. All this contributes to the assumption that private investments are riskier than traditional public markets.
5) Understand the mandate and the parameters of the alternative investment.
Not unlike mutual funds, managers who are registered in the alternative space have very strict guidelines in what they can and cannot do. Understanding the mandate of the manager is very important to ensure your interest is aligned with the manager, making the right decision for your portfolio. Knowing the parameters allows you to make an informed decision about how an investment meets your investment needs as well as your risk tolerance.