The Upside: Making multi-strategy alt funds work for you

[00:01:08] Lauren Gardy: Hello, and welcome to The Upside. I'm your host, Lauren Gardy. Today I'm accompanied by two Fidelity experts, Rory Poole, Director of Alternatives, and Brandon Sims, alternative strategist. Today we'll unpack the history of various alternatives, Fidelity's advantage in this space and finally, our outlook on this popular asset class. Rory, why don't we kick off our discussion today with you. I would say that alternatives have really entered into the mainstream of investing in Canada but this hasn't always been the case. Could you kick off our discussion with a little bit of a back story on this and really what's led alternatives to be one of the largest asset classes in Canada today.

[00:01:46] Rory Poole: For sure, Lauren, and thank you very much for having us on today. I'll tweak a little bit of what you said there in the sense that alternatives are certainly in the mainstream now for, I would say, retail investors which is a place that they haven't been necessarily in the past, as you alluded to, but alternatives, generally speaking, have been around for many, many decades. I would say that two of the reasons why they're becoming a little bit more popular within the retail channel are one, the fact that there's a lot more access for retail investors to alternative forms of investments, whether those be strategies or assets themselves, than maybe there were in the past. We see that with things like the emergence of liquid alternatives over the course of the past six years or so. We also see that with the fact that there are a lot of alternative investment managers, people that actually manage those assets on behalf of investors, that are really looking at the retail space, if you will, or the retail channel and saying to themselves, how can we deliver our products to these individual investors on top of these big institutions or larger investors that were typically the focus of what they do.

[00:03:13] The second thing you mentioned a little bit, how has this space evolved over the course of the past couple of decades or maybe the history behind it. There are many different types of alternative investments, I think Brendan will probably touch on a few of those, but what I would say is that over the last two decades in particular you've seen an emergence of some new forms of alternative investing. Whether it's private equity secondaries, whether it's private credit or even more recently the emergence of cryptocurrencies, there's many different ways that investors can access these differentiated types of investments to add to their portfolio.

[00:03:55] Lauren Gardy: That's helpful, Rory. Brendan, why don't we unpack that a little bit further? If you could give us a bit of a breakdown of the alternative landscape. I know there are hedge funds and privates on one side and then Fidelity is in more of the liquid alternative space. How should we communicate this to investors and perhaps share a few key considerations of each?

[00:04:12] Brendan Sims: I think first order of business would be to tackle the term liquid alternative. It seems a bit of an intimidating term, if you would, but it really shouldn't be. It's a term coined to really just address within the retail landscape what we've deemed to be daily liquid vehicles. That could be a mutual fund traded at end of day or an ETF traded intraday. These are really just vehicles to allow investors to access what are mandates that are playing within the defined parameters set out by the regulators that are granted a little bit of flexibility beyond that of a traditional fund. It was in 2019 that these flexibilities were granted. Fidelity quickly snapped into action with three new products shortly thereafter in 2020. We'll get into that. I think that with respect to the space you hit the nail on the head that it's privates or less liquid assets and then it's liquids or liquid alternatives which are their greater liquidity vehicles that could tap into resources like borrowing against the funds now or an additional source of leverage which we know it would be selling stocks short, the use of derivative instruments and/or other sort of synthetic exposures.

[00:05:14] Playing within the realms of the flexibilities afforded within the liquid alt category in particular I would say that the space in Canada is just shy of about 60 billion in size as we quantify it in and around the time of recording. We can divide that world into five parts. Put simply, it would be alt equity, credit, market neutral, multi-strategy and other. I'll take a moment on the other with the former to be pretty self-explanatory. Other would really be a catch-all for anything that doesn't fit into the previously mentioned categories. Digital assets, as Rory touched on, drive a large portion of the balance and the movement of that space. Where we've seen a lot of the growth year-to-date as well as sort of over the longer term would be in the alt credit and the alt equity. In respective fashion alt credit being long/short fixed income securities and alt equity being long/short equities. That would be the breakdown of the liquid side of the equation. Privates, of course, buildings, private lending, private credit, infrastructure, amongst a number of different other less liquid areas.

[00:06:18] Rory Poole: I would just add on to that the latter, it's key that the real difference there is that products or investments within the private space or the illiquid space are not necessarily exposed to the same ups and downs as that of maybe some of the other liquid investments that are out there. I think that that's kind of the key differentiator between the two.

[00:06:42] Brendan Sims: I'll give two examples for everyone online to maybe just illustrate that. You could have a hedge fund-like vehicle that has liquidity characteristics that would not allow investors to sort of get access to their capital on a daily basis based on the rules and regulations set out by the fund. They might be doing similar things as far as buying and selling stock long and short as a liquid alternative but it's quite simply the vehicle, the liquidity profile that would decide what side of the line it's on, whether it's the liquid or the private side. Similarly, you can have a publicly traded REIT that owns a plaza on one side of the street and a private fund that owns the one on the other with very, very similar characteristics. It's all about liquidity profile.

[00:07:21] Lauren Gardy: That's a very good way to put it so thank you for that. Rory, I wanted to dig a little bit deeper on one type of product that Brendan explained, the multi-strategy fund. Really, from my understanding what that means is that we're bucketing many different types of alternatives within one, maybe if an investor can't decide or just wants some more balanced diversified approach, if you will. Could you talk us through what that strategy actually looks like in practice and some considerations for investors as well.

[00:07:47] Rory Poole: For sure. Multi-strategy, don't try and unpack that any differently than the name actually is indicating. It's ways that investors can access a multitude or various different alternative either strategies or assets in one particular vehicle. Honestly, Lauren, I think that there's no sense in overthinking that this concept of a product that allows for multiple exposures and the key thing that they get out of that is diversification. They have one product that they purchase and they're able to access different types of equities, different types of bonds and do so in a way that's creating this kind of balanced approach towards achieving their investment goals.

[00:08:41] The same concept carries over to alternatives albeit the end result may be a little bit different or the experience might be a bit different, and there's some rhyme to that reason. I think the big benefit that's there for investors at the end of the day is relative to those traditional stocks and bonds that they might want to own I would argue that there's probably a little bit less familiarity with alternative investments and therefore having this kind of package solution that it's easy for them to purchase into and receive that diversification that they're potentially looking for makes it, I think, appealing.

[00:09:18] Lauren Gardy: That does sound very appealing as well. Brendan, could we pivot back to talking about Fidelity Canada in the alternative space? We've been talking about alternatives being around for decades but Fidelity entered into here a little more recently, back in 2020. Why did Fidelity decide to get into alternatives and what advantage should we bring to the table in such a competitive area of the market?

[00:09:39] Brendan Sims: There's a bit of a catalyst that actually happened in the year prior in 2019 as far as the rules that allow and govern Fidelity on the funds that we bring forth. In late 2019 the regulatory landscape shifted to allow the flexibilities for us to bring the products forward, which we did. We launched three liquid alternatives in October of 2020. We were really excited to be entering into this new and growing space at that time, and growing it has been. The space continues to grow at double-digit year-over-year growth rates, of course, changing from one month to the next. I think that we were able to hit the ground running. We're really excited to do so because when we think about long/short investing, specifically through the lens of the equity world which is where we came to market with our initial three products, we have years and years of track record of being really successful on the research front and digging really deep, meeting with thousands of companies, forming opinions about sort of what the next 6, 12, 18+ months will look like.

[00:10:33] I think what it allowed us to do through the lens of long and short investing — for those on the line short side really just means borrowing stock, selling it short and gaining an inverse exposure to if you had invested in that company in a long fashion or taken ownership. What it allowed us to do is take a step beyond just simply omitting names that we met with and formed a negative outlook towards. Say we came across a name that we thought to be facing a headwind in the next 6 to 12 months. We can actually take conviction and have an opportunity to profit on those views and that work that had been done. I think that was a really great thing for us to be able to extend our lineup and tap into all the work that's already getting done but I think it represents a layer within our product shelf where there is a bit of a blank roadmap with respect to what we come out in the flexibilities that we have ahead of us. I think we're really excited, I know Rory and myself are with what we can bring forth in the years to come.

[00:11:27] Lauren Gardy: That's great, thank you. I like the analogy of using all of the tools that are available within a toolbox with the liquid alternative or long/short investing, as you touched on. To wrap up our discussion today, Rory, we have talked a lot today about all this growth and tremendous success we've seen within alternatives in Canada let's look ahead. Five to ten years from now what do you see evolving within the alternative space and what should investors be thinking about?

[00:11:51] Rory Poole: It's a good question, and while I don't have a crystal ball I think that there's a few points I can make. The first is that we're going to continue to see more of what we're seeing right now, particularly as it relates to there's an increasing amount of competition in this space, which is really good for investors at the end of the day because more competition a lot of the time means more choice. If you're an investor looking for something very particular in terms of an investment option or very differentiated compared to what you do within the other areas of your portfolio, if it's not there yet it should be there relatively soon.  I think that that's a positive outcome.

[00:12:30] The second thing that I would say in terms of looking forward is that I that were, as I mentioned at the beginning, in relation to a lot of new alternative investment managers that are entering the space, not only in Canada but also globally, trying to cater or tailor towards the retail investor, we're going to continue to see retail investors gaining more access to some of these private assets or private investments that Brendan and I have been alluding to. That's regardless of whether it's a small piece of a portfolio, a large piece of the portfolio or something in between. I think that the industry as a whole is very keen on individual investors being able to access the benefits that come along with those types of investments.

[00:13:16] Lauren Gardy: Lots of excitement to look forward to.

[00:13:17] Rory Poole: Certainly.

[00:13:18] Lauren Gardy: Thank you both for sharing your views today, really appreciate you taking the time. Thank you to our viewers for watching today. Upside webcasts air daily so keep an eye on your inbox to not miss your invitation to the next show. If you haven't done so already sign up for The Upside newsletter to not miss out. Video podcasts are also released frequently both the Upside and Fidelity Connects so search Fidelity Canada on YouTube, Spotify or Apple podcasts for those. Thanks for watching and I hope you'll join us again on The Upside. I'm Lauren Gardy.