Harking back through all the fog that the Covid-19 pandemic has wrought on our lives, February and March 2020 surely tops the list of most vivid moments for investors. Witnessing global capital markets and portfolios in free fall is not easily wiped from one’s eyes or memory.
Some investors prepared for risks of volatility and declining capital markets by including an allocation in portfolios to alternative investments: those strategies which are not linked directly to the movements of stock and bond markets. These investors understood the power of diversity and had effectively modernized their investment portfolios.
The burgeoning alternative investment sector provided both portfolio protection and generated meaningful growth through to year-end.
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Included in modernized portfolios are strategies involved in private debt and mortgages, private real estate and equity, defensively managed credit and equity strategies, arbitrage funds and other opportunistic, agile growth seeking strategies. They can provide value with much less, and in certain cases, no dependence on broader market direction.
Formerly only available to large institutions and wealthy investors, Canadian securities regulators provided broad access to certain non-traditional strategies starting in 2019 to all Canadian investors. This followed many years of study and consultation, concluding that access to more complex investment strategies for private individual investors would be of benefit to their savings and retirement goals.
By allocating at least some capital to an increasingly wide selection of available strategies, styles and objectives, a portfolio can be more insulated from risks of interest rates rising, equity market volatility and macro issues. The Canada Pension Plan Investment Board (CPPIB) expanded their portfolio beyond stocks and bonds starting 20 years ago. The CPPIB now holds over 60% in alternative assets, earning income and growth in this allocation from a variety of investment styles complementing their traditional holdings.
As an indication for how some of these strategies panned out in the spring of 2020, we can look at the Scotiabank Hedge Fund Index – Asset Weighted, a composite of various non-traditional strategies. It was down 7.50% through February and March, compared with global markets falling 20% or more, with the TSX Composite losing 37% at its lowest point. When federal governments opened the fiscal stimulus taps, broad market indices staged a sharp and sustained rally into the year end. By the end of November, the SHFI-AW had increased by 8.20% year to date, posting a return in line with an average year on the stock markets without the pain and volatility, and which compares very favourably to the TSX Composite return last year of 2.2%. Investors thinking differently about how to position their portfolios were far less impacted by sudden declines and earned strong returns through the year. The enhanced diversity worked well.
The key to including other types of investments is to determine what purpose you want served from each; in other words, to assess what you are trying to achieve. You may be seeking higher income potential, increased stability in capital, outsized returns or opportunities unavailable in traditional stock and bond holdings. Conversely, you need to be comfortable with what you may be giving up in return whether immediate liquidity, upside potential or insulation from other risks, and whether alternative investments are right for you at all.
To paraphrase Warren Buffett, investing is simple in theory but difficult in practice. The goal of the CPPIB is uncomplicated and one which we can all relate to: to maximize returns over the long term without undue risks. No gain is had without accepting risk – being comfortable with the risks you are embracing is as critical as is reducing these risks as much as possible while still positioned to meet your goals. Investing is a long and evolving journey which must be experienced in real time – in tangible terms, this implies more comfort and peace of mind with less mistakes made along the way.
As investors, we can be assured that at some stage interest rates will rise thereby decreasing bond principal, equity markets will experience bouts of volatility that are extreme at times and that macro events beyond anticipation or control will all impact our hard-earned savings. Investors with more tools in their bag are better positioned regardless of market forecasts.
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Modern Portfolio Theory established in 1952, defining optimal diversity by way of the appropriate mix of cash, bonds and stocks for a chosen risk profile earned Harry Markowitz a Nobel Prize. This ground- breaking theory has worked well for many years. However, in practice MPT has been challenged by issues of practicality including historically low cash and bond yields, as well as increased equity market volatility and and intermarket correlations. In addition, his theory does not account for investors who desire a degree of protection on their savings during times of market turmoil, seeking short-term protection to ensure comfort through the long term. To be fair, at the time Mr. Markowitz did not have access to various alternative strategies in order to properly diversify an investment portfolio. If he had, I suspect he would have included some private real estate and maybe a hedged equity strategy or perhaps an arbitrage fund. In the more-modern portfolio, it is now possible for you to reap such benefits.
Craig Machel, FMA, CIM, is director of Wealth Management, Investment Advisor and Portfolio Manager with The Machel Group of Richardson Wealth Ltd.
TORONTO – Canada’s main stock index was down more than 200 points in late-morning trading, weighed down by losses in the technology, base metal and energy sectors, while U.S. stock markets also fell.
The S&P/TSX composite index was down 239.24 points at 22,749.04.
In New York, the Dow Jones industrial average was down 312.36 points at 40,443.39. The S&P 500 index was down 80.94 points at 5,422.47, while the Nasdaq composite was down 380.17 points at 16,747.49.
The Canadian dollar traded for 73.80 cents US compared with 74.00 cents US on Thursday.
The October crude oil contract was down US$1.07 at US$68.08 per barrel and the October natural gas contract was up less than a penny at US$2.26 per mmBTU.
The December gold contract was down US$2.10 at US$2,541.00 an ounce and the December copper contract was down four cents at US$4.10 a pound.
This report by The Canadian Press was first published Sept. 6, 2024.
TORONTO – Canada’s main stock index was up more than 150 points in late-morning trading, helped by strength in technology, financial and energy stocks, while U.S. stock markets also pushed higher.
The S&P/TSX composite index was up 171.41 points at 23,298.39.
In New York, the Dow Jones industrial average was up 278.37 points at 41,369.79. The S&P 500 index was up 38.17 points at 5,630.35, while the Nasdaq composite was up 177.15 points at 17,733.18.
The Canadian dollar traded for 74.19 cents US compared with 74.23 cents US on Wednesday.
The October crude oil contract was up US$1.75 at US$76.27 per barrel and the October natural gas contract was up less than a penny at US$2.10 per mmBTU.
The December gold contract was up US$18.70 at US$2,556.50 an ounce and the December copper contract was down less than a penny at US$4.22 a pound.
This report by The Canadian Press was first published Aug. 29, 2024.
The crypto market has recently experienced a significant downturn, mirroring broader risk asset sell-offs. Over the past week, Bitcoin’s price dropped by 24%, reaching $53,000, while Ethereum plummeted nearly a third to $2,340. Major altcoins also suffered, with Cardano down 27.7%, Solana 36.2%, Dogecoin 34.6%, XRP 23.1%, Shiba Inu 30.1%, and BNB 25.7%.
The severe downturn in the crypto market appears to be part of a broader flight to safety, triggered by disappointing economic data. A worse-than-expected unemployment report on Friday marked the beginning of a technical recession, as defined by the Sahm Rule. This rule identifies a recession when the three-month average unemployment rate rises by at least half a percentage point from its lowest point in the past year.
Friday’s figures met this threshold, signaling an abrupt economic downshift. Consequently, investors sought safer assets, leading to declines in major stock indices: the S&P 500 dropped 2%, the Nasdaq 2.5%, and the Dow 1.5%. This trend continued into Monday with further sell-offs overseas.
The crypto market’s rapid decline raises questions about its role as either a speculative asset or a hedge against inflation and recession. Despite hopes that crypto could act as a risk hedge, the recent crash suggests it remains a speculative investment.
Since the downturn, the crypto market has seen its largest three-day sell-off in nearly a year, losing over $500 billion in market value. According to CoinGlass data, this bloodbath wiped out more than $1 billion in leveraged positions within the last 24 hours, including $365 million in Bitcoin and $348 million in Ether.
Khushboo Khullar of Lightning Ventures, speaking to Bloomberg, argued that the crypto sell-off is part of a broader liquidity panic as traders rush to cover margin calls. Khullar views this as a temporary sell-off, presenting a potential buying opportunity.
Josh Gilbert, an eToro market analyst, supports Khullar’s perspective, suggesting that the expected Federal Reserve rate cuts could benefit crypto assets. “Crypto assets have sold off, but many investors will see an opportunity. We see Federal Reserve rate cuts, which are now likely to come sharper than expected, as hugely positive for crypto assets,” Gilbert told Coindesk.
Despite the recent volatility, crypto continues to make strides toward mainstream acceptance. Notably, Morgan Stanley will allow its advisors to offer Bitcoin ETFs starting Wednesday. This follows more than half a year after the introduction of the first Bitcoin ETF. The investment bank will enable over 15,000 of its financial advisors to sell BlackRock’s IBIT and Fidelity’s FBTC. This move is seen as a significant step toward the “mainstreamization” of crypto, given the lengthy regulatory and company processes in major investment banks.
The recent crypto market downturn highlights its volatility and the broader economic concerns affecting all risk assets. While some analysts see the current situation as a temporary sell-off and a buying opportunity, others caution against the speculative nature of crypto. As the market evolves, its role as a mainstream alternative asset continues to grow, marked by increasing institutional acceptance and new investment opportunities.
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