“Internally, dealers have been slowly adopting more favourable ratings to better reflect the historical risk metrics of alternative funds per the AIMA & CAIA [Chartered Alternative Investment Analyst] Risk Rating Guidelines,” Kaura says. “As more firms put alternatives on their product shelves with medium and low ratings, more portfolio space will open up for these investments.”
Alternatives have also been sideswiped by the recent client-focused reforms, as bank-owned dealers reduced selling third-party funds or moved to more proprietary models on their shelves because of stiffer KYP documentation requirements. Among advisors in Canada and worldwide, a lack of education, additional paper requirements, insufficient transparency, and uncertainty regarding the products – how a fund would perform during various market cycles, for example – have also been cited as reasons preventing further adoption, cites Van Wyk-Allan.
Still, adoption of alternative investments should pick up over time. With a laundry list of challenges confronting today’s investors including recession fears, 40-year highs in inflation, higher-for-longer interest rates, and declining pension coverage, Kaura estimates liquid-alt allocations will eventually reach the 10% to 20% range.
“We are heading toward a golden age for alternatives, which are becoming more attractive as the global economic picture deteriorates,” she says. “Wealth advisors must seek solutions to protect clients from market swings and impacts. I think we’ll see the outdated traditional 60-40 model balanced portfolio replaced with a 50-30-20 model that includes alternatives as capital moves away from public markets.”
