How Canada’s Hedge Fund Sector Continues to Evolve

Authored By: Claire Van Wyk-Allan | Publish Date: May 29, 2018

When the Alternative Investment Management Association (AIMA) first opened a branch in Canada 15 years ago, the hedge fund sector in this country was just starting and still small. The way firms were set up and products marketed was very different to today. Indeed, as we mark our crystal anniversary in Canada, it is thrilling to look back and see how far the industry has truly come in this country and to see where it is headed.

Back in 2003, AIMA had ‘only’ 38 corporate members in Canada and many alternative asset management firms were providers of niche products to wealthy high net worth (HNW) clients. Today, with over 160 corporate members, most of our members in Canada are also serving institutional clients and a truly retail client base is continuing to emerge.

Next Level

The next level of industry transformation is a very client-driven and technology-driven phase in the industry’s evolution.

Canada is well-placed to thrive during this next phase of innovation as our country has long been a pioneer in the hedge fund and alternatives space. From managed futures, wrapped notes, and other structured products to hybrid strategies that incorporate private debt, ETFs, and other securities, Canada’s alternatives industry has always stood out as being innovative and inclusive to a much wider investing base than just the rich.

That same innovation will be key to the continued success of the alternative industry as it grows and changes.

Both in Canada and around the world, alternative investment manager firms are evolving rapidly to meet changing client demands and expectations. The pace of technological change and the rise of artificial intelligence and other disruptive technologies are pushing hedge fund firms to re-evaluate who they hire, how they operate, and how they invest. From ‘AI’ and algorithm-driven strategies to cryptocurrencies and automated portfolio management, the next iteration of alternatives offerings must innovate to retain their competitive advantage.

At the same time, hedge funds are having to contend with increasing investor demands for ESG considerations and more responsible investment. It’s no longer just enough for hedge funds to do better ‒ they must do good as well.

A broad retail client base is also emerging, where ongoing regulatory changes are likely to lead to more hedge fund-like products being made available to all investors. The Canadian Securities Administrators’ amendments to existing regulations on investing in alternative funds are destined to prove a game-changer. The proposed amendments in National Instrument 81-102 would allow alternative funds to be offered in Canada with a simplified prospectus, annual information form, and fund facts, in the same manner as mutual funds while adhering to a comprehensive regulatory framework.

These regulatory changes are important for Canada’s alternatives industry as they will open it to all retail investors, allowing the alternative investment space to grow and giving advisors and their investors greater access to products that can offer diversification, risk reduction, and non-correlated returns. This naturally calls for more transparency on all levels, which both the new CSA rules and the evolution of technology within the industry hope to permit.

Navigate A Sea

However, education will be paramount as advisors and investors alike navigate a sea of new product. AIMA, both globally and at home in Canada, is steadfast in our focus to lead with sound practices with respect to due diligence, reporting, risk management, cyber security, and other aspects of the industry that may not be as familiar to a mainstream investing audience. This will also include multiple resources to educate advisors on how alternatives fit within a broad, balanced portfolio and assist with their understanding of proper due diligence when evaluating these products.

Overall, the alternative investment industry is experiencing a significant transformation – what took us here will not take us forward. Industry leaders recognize this and understand that they will have to embrace innovation and change in order to survive – just as AIMA in Canada will rise to the opportunity alongside our members to help pave the new way forward.

Claire Van Wyk-Allan is director and head of Canada for AIMA

 

 


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