5 Best Liquid Alternative Funds in Canada 2022: Look Beyond Stocks

While most retail investors are building portfolios with stocks and bonds, most institutional investors include other assets such as real estate, private equity, and hedge fund strategies. These can be thought of as alternatives.

When markets are choppy and bonds fail to properly diversify against downside risk, alternatives can be a great option to consider for lowering a portfolio’s volatility.

We will cover the best liquid alternative funds in Canada below and discuss some of their features.

The Different Types of Liquid Alternatives

A liquid alternative is essentially a hedge fund strategy that is wrapped in an easy-to-trade investment wrapper such as an ETF.

This approach to accessing hedge fund strategies reduces a lot of the headaches involved with purchasing a traditional offering memorandum (OM) hedge fund.

The key to success when investing in liquid alternatives is to understand that they vary drastically in structure, risk, and targeted performance. Liquid alternatives can come in several forms, some of which include:

  • Long-short
  • Dedicated Short bias
  • Market-Neutral
  • Merger Arbitrage

A market-neutral strategy will generally target conservative returns, regardless of any market conditions.

This is drastically different from a dedicated short bias fund, which will aim to provide returns when markets are falling through their short positions.

Liquid Alternatives in Canada – A Short Track Record

Within Canada, most liquid alternative ETFs were launched once changes to industry regulations took place at the beginning of 2019.

This means that most liquid alternative ETFs in Canada will have a very short performance track record.

Considering that some liquid alternatives did not launch immediately after these regulatory changes in early 2019, these funds will have an even shorter performance track record.

Best Liquid Alternative Funds in Canada

1. Desjardins Alt Long/Short Equity Market Neutral ETF

Desjardins Logo
  • Ticker – TSE: DANC
  • Market Price: $21.28
  • Inception Date: January 24, 2019
  • Assets under Management: $814.6 million
  • Management Expense Ratio: 1.14%
  • Listed on: Toronto Stock Exchange
  • Annualized Yield: 0.19%
  • Type of Strategy: Market-Neutral, Equity Pair Trades
  • Performance Fee: No

DANC is the first liquid alternative on our list, offered by Desjardins in Canada. This fund is a market-neutral strategy, meaning that it aims to generate modest returns throughout all market conditions.

Market-neutral strategies tend to have much lower volatility than traditional funds or investments. This can sometimes make them great substitutes for cash or fixed income.

DANC is a very large Canadian liquid alternative ETF. When compared to other liquid alternative funds in Canada, it comes at a relatively low MER.

Desjardins labels DANC as a low-risk fund. The ETF has roughly 100 underlying holdings (both long and short positions), which makes it very well diversified.

DANC pays a very low annualized yield. Its distributions are paid out to investors on a quarterly basis.

As a market-neutral strategy, DANC is a great addition to most portfolios on the conservative side of your asset allocation. It can do a great job sheltering assets when markets experience volatility.

2. CI Marret Alternative Enhanced Yield Fund

CI Global Asset Management Logo
  • Ticker – TSE: CMEY
  • Market Price: $19.81
  • Inception Date: May 14, 2020
  • Assets under Management: $124.6 million
  • Management Expense Ratio: 1.1%
  • Listed on: Toronto Stock Exchange
  • Annualized Yield: 3.5%
  • Type of Strategy: Long-short Fixed Income
  • Performance Fee: Yes

Next on our list is CI’s Alternative Enhanced Yield Fund. CMEY is a long-short fixed income strategy that looks to provide good income with lower volatility.

Long-short strategies aim to have lower volatility than the overall market due to their short component. This volatility is relatively higher than that of a market-neutral strategy, but long-short funds can target a higher potential return.

CMEY is a large Canadian liquid alternative ETF. It comes at a relatively low MER compared to other liquid alternative funds but can also charge investors a performance fee.

CI presents CMEY as a low-to-medium risk strategy. The fund has over 300 underlying holdings, making it extremely well diversified.

CMEY offers a great yield. It pays investors a monthly distribution.

For investors that are looking for a great yield with relatively lower volatility, CMEY is a great option to consider.

3. CI Munro Alternative Global Growth Fund

CI Global Asset Management Logo
  • Ticker – TSE: CMAG
  • Market Price: $18.4
  • Inception Date: January 23, 2020
  • Assets under Management: $1.93 billion
  • Management Expense Ratio: 1.92%
  • Listed on: Toronto Stock Exchange
  • Annualized Yield: 0%
  • Type of Strategy: Long-short Equity
  • Performance Fee: Yes

The next liquid alternative is another long-short fund by CI, although it is much different from CMEY. CMAG invests mainly in global growth stocks and has an absolute return objective. This means that the fund aims to have a positive return regardless of overall market conditions.

CMAG is massive in terms of assets under management. It comes with a very high management fee in exchange for its attempt at generating positive returns through all markets as well as preserving capital.

The fund can charge investors a performance fee.

The ETF is labeled as medium risk by CI. It utilizes short selling, derivatives, and leverage in order to pursue its investment mandate.

CMAG has just over 35 underlying holdings, making it concentrated with regard to its stock exposure. The fund does not pay a yield, making it less attractive for investors looking for a constant income stream.

CMAG is a great fund to consider if you have a higher risk tolerance and are looking for relatively higher target returns over time.

4. NBI Liquid Alternatives ETF

NBI LOGO
  • Ticker – TSE: NALT
  • Market Price: $24.54
  • Inception Date: February 8, 2019
  • Assets under Management: $233.8 million
  • Management Expense Ratio: 0.69%
  • Listed on: Toronto Stock Exchange
  • Annualized Yield: 5.17%
  • Type of Strategy: Long-short Multi-asset
  • Performance Fee: No

Up next on our list is a liquid alternative ETF offered by National Bank. NALT aims to provide investors with a positive return while having lower volatility than global equity markets. NALT can invest in various asset classes and is a long-short strategy.

In terms of size, NALT is a fairly large ETF. It comes with a very low management expense ratio when compared to other liquid alternative peers. It also does not charge investors a performance fee.

The ETF is labeled as medium risk by National Bank. The ETF uses short selling and may deploy leverage up to 300% of its net asset value.

NALT has less than 20 underlying holdings, making it extremely concentrated. The fund has a high yield and pays distributions to investors on an annual basis.  

Given its great overall features as a liquid alternative fund, NALT is a top pick as a medium-risk liquid alternative to consider for your portfolio.

5. Picton Mahoney Fortified Income Alternative Fund

Picton Mahoney Fortified Logo
  • Ticker – TSE: PFIA
  • Market Price: $9.93
  • Inception Date: July 12, 2019
  • Assets under Management: $350.0 million
  • Management Expense Ratio: 1.79%
  • Listed on: Toronto Stock Exchange
  • Annualized Yield: 4.23%
  • Type of Strategy: Long-short Fixed Income
  • Performance Fee: Yes

Last on our list is yet another long-short strategy, this time offered by Picton Mahoney. PFIA aims for modest returns by running a long-short fixed income strategy using mainly corporate bonds. It is a fairly conservative strategy based on its historical volatility.

PFIA is large in terms of assets under management. It comes with a low management fee when compared to peers, but it also charges investors a sizable performance fee. This can push the total MER to a high level.

PFIA is labeled as low-to-medium risk by Picton Mahoney.

PFIA has over 170 underlying holdings making it well diversified. The fund has a high yield and pays distributions to investors on an annual basis. 

On the more conservative side due to its fairly low volatility, PFIA is another great liquid conservative to consider as a diversifier for your portfolio

How to Buy the Best Liquid Alternative Funds in Canada

The cheapest way to buy ETFs is from discount brokers. My top choices in Canada are:

Readers Choice
Qtrade
Qtrade
  • 105 commission-free ETFs to buy and sell
  • Excellent customer service
  • Top-notch market research tools
  • Easy-to-use and stable platform 
Low Fees
Wealthsimple Trade
Wealthsimple Trade
  • Stock and ETF buys and sells have $0 trading fees
  • Desktop and mobile trading
  • Reputable fintech company
  • Fractional shares available
Well-Rounded
Questrade
Questrade
  • ETF buys have $0 trading fees
  • Excellent market research tools
  • Most types of registered accounts available

To learn more, check out my full breakdown of the best trading platforms in Canada.

Conclusion

Although bonds are usually thought of as balancing out a portfolio from a risk perspective, there are some situations in which stocks and bonds can fall at the same time.

In these situations, uncorrelated assets such as liquid alternatives can help with your portfolio’s performance.

Given that each liquid alternative typically has a very complex strategy, it is absolutely crucial to read as much as you can on a specific fund before investing. Remember that it is difficult to compare liquid alternative funds amongst themselves because of their complex and differing strategies.

If you are exploring the alternative investment space to further diversify your portfolio, make sure to also consider real estate as an option and how to best incorporate it into your portfolio.

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Author Bio - Christopher Liew is a CFA Charterholder with 11 years of finance experience and the creator of Wealthawesome.com. Read about how he quit his 6-figure salary career to travel the world here.

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