14 Best Alternative Investments In Canada (2024)

If you are looking for ways to strengthen your portfolio, implementing alternative investments can be a great approach.

Canada Pension Plan’s recent asset mix showed an allocation of well over 50% towards alternative investments, with 32% going to private equity alone.

We will discuss the best alternative investments in Canada and outline why it makes sense to strongly consider this group of investments for most portfolios.

What is an Alternative Investment?

The easiest way to define an alternative investment is to explain what it isn’t – a traditional investment. Traditional investments include:

• Publicly-traded stocks (as well as mutual funds and ETFs containing them)
• Most bonds and fixed income that are available to trade
• Cash, GICs, high-interest savings accounts

Investments or assets outside of this list fall into the alternative investment category.

We will go through a comprehensive list of alternative investments further below.

Pros and Cons of Alternative Investments

Alternative investments, like all other assets that you can invest in, come with their advantages and disadvantages. Several disadvantages can be avoided based on your characteristics as an investor.

It is important to do a lot of careful research before investing in alternative assets or alternative funds.

Best Alternative Investments in Canada

1. Physical Real Estate

• Professionally Managed: No
• Liquidity: Low
• Risk: Medium-to-High
• Income Potential: Varies
• Easy to Access: Yes

Physical real estate is one of the most common assets that people own. It refers to physically owning property, which can include:

• Land
• Single-Family Property (house)
• Commercial Property (store, mall, plaza, etc.)
• Multi-Family (Building with multiple units)
• Hotels

As a buyer of physical real estate, you are responsible for managing it and renting it out for income. It is an illiquid alternative because buying and selling properties is a tedious process.

Physical real estate falls between stocks and bonds in terms of risks, especially because you can’t see daily fluctuations in the value of your properties. Income potential will depend on whether your properties are rented or not.

Lastly, physical real estate is accessible to almost all investors, assuming that they have the means to purchase it.

2. Listed Real Estate (REITs)

• Professionally Managed: Yes
• Liquidity: High
• Risk: Medium-to-High
• Income Potential: High
• Easy to Access: Yes

Listed real estate (through REITS) is another way to access real estate and a different alternative to consider. A REIT pools together capital from investors. It then purchases properties, manages them, and passes rents back to investors.

REITs typically trade on exchanges, similar to stocks. They are considered to be riskier than physical real estate because investors will see daily price volatility. REITs behave more like stocks in the short term and more like physical real estate in the long term.

REITs are usually very liquid and are accessible to most investors. The rents passed on to investors usually result in a high-income stream.

Make sure to take a look at some of the best REITs in Canada.

3. Private Equity Funds

• Professionally Managed: Yes
• Liquidity: Very Low
• Risk: High
• Income Potential: Very Low
• Easy to Access: No

Private equity funds invest in companies that are not publicly listed (don’t have a stock trading on an exchange). They usually buy a controlling share or a full company outright by pooling money from investors.

The private equity company then attempts to improve operations or profitability in order to sell it for a profit further down the road. Private equity funds either use leveraged buyouts (taking on debt to buy a company) or venture capital (investing in small, start-up companies.

Private equity funds usually come with long lock-up periods and with little or no income potential. They are usually considered high risk but can lead to exceptional returns.

Private equity funds typically come with high fees and performance fees above a specific level.

4. Hedge Funds (Offering Memorandum)

• Professionally Managed: Yes
• Liquidity: Depends on Strategy
• Risk: Depends on Strategy
• Income Potential: Depends on Strategy
• Easy to Access: No

Hedge funds are almost always actively managed and are usually sold with an offering memorandum (OM). This greatly restricts your ability to invest in OM hedge funds unless you are an accredited investor.

Hedge funds can be extremely different in terms of strategy, risk, and return. They can invest in virtually anything. Some examples of hedge fund strategies include:

• Global macro
• Market-neutral
• Long-short
• Short-biased

Income, liquidity, and risk will vary substantially across different strategies (and within strategies as well).

Hedge funds typically come with high fees and the addition of performance fees, which reward portfolio managers for exceeding a pre-specified return or beating a benchmark.

5. Hedge Funds (Liquid Alternatives)

• Professionally Managed: Yes
• Liquidity: High
• Risk: Depends on Strategy
• Income Potential: Depends on Strategy
• Easy to Access: Yes

Hedge funds can also be added to a portfolio as “liquid alternatives.” A liquid alternative is a hedge fund that is packaged in either a mutual fund or ETF wrapper and made available to most investors. In the case of a liquid alternative ETF, it trades on an exchange like any other stock.

Like OM hedge funds, liquid alternatives vary in terms of risk, return, and income. By being packaged in a mutual fund or ETF wrapper, liquidity and ease of access increase tremendously.

Liquid alternatives, like OM hedge funds, tend to come with high fees and are also usually offered with a performance fee.

Make sure to thoroughly assess a liquid alternative before investing in it, or take a look at our list of some of the best liquid alternatives in Canada.

6. Private Debt

• Professionally Managed: If Investing through a Fund
• Liquidity: Low
• Risk: Medium-to-High
• Income Potential: High
• Easy to Access: No

Private debt can either be accessed through a fund (professionally managed) or done directly with the end borrower. In a lot of cases, private debt refers to relatively higher-risk loans to individuals that can’t access additional credit through traditional sources (such as a bank).

Private Debt funds pool capital from investors before loaning it out to borrowers. Debt can also be issued directly outside of a formal fund structure, where it becomes the investor’s responsibility to structure.

Lending money to high-risk borrowers can come with very high-interest rates (and, therefore, high-income streams). The main risk here becomes default risk, or the borrower’s ability to repay the principal at maturity.

Private debt is usually illiquid once issued.

7. Cryptocurrencies

• Professionally Managed: If Investing through a Fund
• Liquidity: High
• Risk: Very High
• Income Potential: None
• Easy to Access: Yes

Cryptocurrencies are gaining more and more attention as people begin thinking of them as a speculative asset. Recent legislative changes in Canada have also allowed crypto funds to be created and sold to investors.

The main two cryptocurrencies globally are currently Bitcoin and Ether. A large number of smaller cryptocurrencies exist, but these come with an even higher risk. Cryptocurrencies are usually purchased through a crypto wallet.

Cryptocurrency ETFs allow investors to include the speculative investment within tax-preferred accounts.

Although cryptocurrencies are very liquid, they are usually considered very high-risk and have no income potential unless a crypto fund uses a covered call strategy.

8. Commodities

• Professionally Managed: If Investing through a Fund
• Liquidity: High
• Risk: High
• Income Potential: None
• Easy to Access: Yes

Commodities refer to raw materials that are frequently traded through futures contracts on a futures exchange. Some examples include soybeans, oil, beef, gold, and coffee.

Trading commodities through futures can be very risky since futures are leveraged. Commodity contracts are either cash-settled or physically settled and require extensive research and trading knowledge.

Commodities are also usually available through ETFs or mutual funds. These funds are sometimes based on the price of the underlying futures for the commodity, or the funds invest in stocks that are involved in some way with the commodity (i.e. copper mining stocks).

Commodities can be a good way to diversify a portfolio and protect against inflation as they tend to increase in price during inflationary times.

Investing in commodities is usually fairly liquid but comes without any income potential. Commodities are easily accessible by the average investor.

9. Art and Other Collectibles

• Professionally Managed: No
• Liquidity: Low
• Risk: High
• Income Potential: None
• Easy to Access: Yes

Art and other expensive collectibles (such as rare cars) are also considered an asset class and an alternative investment when it comes to building a portfolio.

Typically, these assets are acquired through auctions or private sales, making them fairly illiquid. They are also typically heterogeneous, meaning that very rarely are two pieces identical.

Art and collectibles vary in performance based on overall trends and preferences of collectors and wealthy individuals. Prices are mainly driven by supply and demand.

This alternative investment comes with a fairly high risk, low liquidity, and limited or no potential for generating income.

Average investors are typically able to invest in art and collectibles as long as they are able to afford them.

10. Foreign Currencies

• Professionally Managed: If Investing through a Fund
• Liquidity: High
• Risk: High
• Income Potential: None
• Easy to Access: Yes

Foreign currencies can be invested in as an alternative asset. This can be done by directly buying and selling on the forex markets, by investing through an ETF or a mutual fund, or by simply purchasing the currency physically.

Currencies appreciate and depreciate between one another based on several factors. These include:

• Differences in interest rates between the countries
• Differences in inflation between countries

You may have exposure to different foreign currencies through your traditional investments if these are located outside of Canada. International or global funds are either currency hedged or currency unhedged.

Foreign currencies are typically very liquid, are considered high risk, have no potential for income, and are easily accessible to the average investor.

11. Financial Derivatives

• Professionally Managed: If Investing through a Fund
• Liquidity: Depends
• Risk: High-to-Very High
• Income Potential: Depends
• Easy to Access: Yes

Financial derivatives are also sometimes encountered through more traditional investment funds. Common examples are covered call mutual funds or ETFs which are becoming increasingly popular in Canada.

Financial derivatives typically refer to:

• Forwards
• Futures
• Options
• Swaps

Financial derivatives are well-named because their price is usually derived from the price of a different underlying asset.

There are a lot of different investment approaches to take with financial derivatives, and they may even be the entire basis of a fund.

The liquidity of a derivative depends on what type of derivative you are investing in. Derivatives tend to be high or very high risk because they are often leveraged. They can be used to generate income and are easily accessible to the average investor.

12.  Reinsurance

• Professionally Managed: Yes
• Liquidity: Average
• Risk: High
• Income Potential: Medium-High
• Easy to Access: No

A growing area of interest in the hedge fund space is the concept of reinsurance. Insurance companies sometimes wish to offload certain insurance policies (or groups of policies) in order to have better control of risk. These policies are then structured into a product and sold.

One of the key benefits of accessing these insurance-linked products is that they are highly uncorrelated from overall markets. The insurance products depend on underlying conditions (such as a natural catastrophe), which should be entirely independent of the performance of markets.

Reinsurance is typically accessed through a hedge fund, and insurance-linked products typically have average liquidity once properly structured. Reinsurance has the potential to generate good income through premiums.

Since reinsurance is typically accessible through hedge funds, it is likely difficult or impossible to access for the average investor.

13. Non-Fungible Tokens (NFTs)

• Professionally Managed: If Investing through a Fund
• Liquidity: Very Low
• Risk: Very High
• Income Potential: None
• Easy to Access: Yes

An NFT is a new type of highly speculative investment that has become popular with the increased adoption of blockchain technology.

NFTs outline ownership in either a physical or digital asset within a blockchain. It’s important to understand that owning an NFT currently does not have any legal meaning around ownership or rights.

An example of an extremely popular NFT is that of the bored ape series.

Owning an NFT of a digital asset does not prevent you or others from sharing that asset.

With the increased popularity of investing in NFTs, professionally-managed NFT funds have begun to emerge for investors to easily access.

NFTs are currently highly illiquid and come with extremely high risks. They do not generate income and are typically easily accessible by average investors.

14. Structured Products

• Professionally Managed: If Investing through a Fund
• Liquidity: Medium
• Risk: Depends on Strategy
• Income Potential: Depends on Strategy
• Easy to Access: Yes

Structured products are typically thought of as highly-customizable alternative fixed-income investments. Common examples that you may encounter include market-linked GICs, principal-protected notes, or principal-at-risk notes.

Structured products are usually created by an issuer and come with issuer risk (the terms of the offering are backed by whoever created the product). A market-linked GIC, for example, can provide investors with some of the return of an underlying index or basket of stocks over a fixed investment period.

These alternative investments can be extremely different and can be customized to be a higher or lower risk or to offer a high or no income stream.

Structured products are somewhat liquid since they can usually be sold back to the issuer before their term matures. Market-linked GICs and structured notes are common structured products that are available to most investors.

Investor Types when Considering Alternatives

Alternative investments, depending on their nature and complexity, may not be available for all investors to purchase. Alternatives do not always have to be purchased within an investment account.

Some examples of alternatives that can be purchased outside of an investment account include:

• Real estate
• Art
• Commodities (physically)
• Cryptocurrencies
• Digital assets
• Luxury cars
• Collectibles

Managed alternatives such as private equity funds and hedge funds may only be available to specific investors. These are usually reserved for institutional investors or high-net-worth retail investors who meet specific criteria.

Accredited Investors

Accredited investors are able to access investment strategies not available to the general public. Although there are several ways to qualify as an accredited investor, the main ones are:

1. An individual who beneficially owns, or who together with a spouse beneficially own, financial assets having an aggregate realizable value that, before taxes but net of any related liabilities, exceeds $1,000,000;
2. An individual whose net income before taxes exceeded $200,000 in each of the two most recent years or whose net income before taxes combined with that of a spouse exceeded $300,000 in each of those years and who, in either case, has a reasonable expectation of exceeding the same net income level in the current year;
3. A company, limited liability company, limited partnership, limited liability partnership, trust or estate, other than a mutual fund or non-redeemable investment fund, that had net assets of at least $5,000,000 as reflected in its most recently prepared financial statements

Eligible Investors

Eligible investors have more of an ability to invest in alternatives than average investors or non-eligible investors.

An eligible investor is an individual who has:

1. Net assets, alone or with a spouse, in the case of an individual, exceed $400,000,
2. Net income before taxes exceeded $75,000 in each of the 2 most recent calendar years, and who reasonably expects to exceed that income level in the current calendar year, or
3. Net income before taxes, alone or with a spouse, in the case of an individual, exceeded $125,000 in each of the 2 most recent calendar years and who reasonably expects to exceed that income level in the current calendar year

Non-Eligible Investors

Non-eligible investors are extremely restricted in the types of managed alternative solutions they can purchase.

Are Managed Alternative Investments Worth the Fees?

Professionally managed alternative investment strategies, whether they are hedge funds or private equity funds, tend to come with higher fees (and additional performance fees on top).

Depending on the nature of the strategy, these funds can range from being conservative to being extremely high risk. More complex hedge funds may also be able to generate absolute returns, meaning positive returns through all market conditions.

There are several critical things to consider before deciding if an alternative fund is worth the fees:

• Historical performance, especially relative to its benchmark
• Length of track record
• Stability of portfolio management team
• How high the fund’s fees are relative to peers

Within the managed alternatives space, almost all funds are actively managed. Whether a fund is worth its fees should be determined on a fund-by-fund basis.

Which Investments Have the Best Returns in Canada?

Some of the best-performing investments are likely to be found in the alternative space. Between 1990 and 2010, private equity firms outperformed the S&P 500 by 6.3%, net of fees.

Institutional portfolios (pension funds, endowments, etc.) are typically substantially more sophisticated and better diversified than the average retail investor’s portfolio. The key difference is the large allocation to alternatives, as seen in these charts here:

Is Bitcoin an Alternative Investment?

Bitcoin is considered an alternative investment. More specifically, Bitcoin is considered a digital asset.

Is an ETF an Alternative Investment?

Some ETFs may be considered alternative investments. Alternatives in ETF form are typically considered “liquid alternatives” and can generally be accessed by all types of investors.

Conclusion

The alternatives space is very broad and complicated to understand for the average investor.

Every single feature of an alternative investment can be different from one to another. Make sure that you understand key elements of an alternative before investing, including risk, return, liquidity, and fees.

Before investing in alternatives, make sure that you have properly assessed your current situation and future goals.