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Alternative Investments in Canada: What they are & how they work

Once reserved for high-net-worth individuals and institutional investors, alternative investments have exhibited strong growth over the last decade to include a greater variety of investors. The reason is simple: alternative investments and asset classes are becoming staples of the modern portfolio, capable of bolstering long-term performance while lowering overall portfolio risk.

We’ve prepared this short guide for new and seasoned investors to explore alternative investments and how you can ultimately take advantage of Amur Capital’s alternative investment solutions to diversify your portfolio.

Key takeaways:

  • Alternative investments diversify portfolios beyond traditional assets like stocks or bonds, providing resilience during market downturns.
  • Alternative investments offer benefits such as enhanced expected returns, reliable income streams, and protection against inflation.
  • Investors must seek advice from expert fund managers to plan their investment strategy, carefully weighing illiquidity and higher risks associated with some alternative asset classes.

What are alternative investments?

Alternative investments are financial assets different from publicly traded investments, such as stocks, bonds, and cash (often called traditional investments). Because they tend to have a minimal correlation to traditional equity and fixed-income markets, alternative investments can provide diversified and higher risk-adjusted returns for an investor’s portfolio.

Many alternative investments vary in their structure, but they share a few key traits:

  • They’re often less liquid than traditional investments because they are not traded in public markets/exchanges, so they can’t be quickly sold or exchanged for cash.
  • They have a low correlation to the equity market, which may be beneficial when the market experiences a downturn.
  • They employ unique investment strategies, such as private equity, hedge funds, and real estate, offering investors access to specialized markets. 

However, as with traditional investments, investing in alternatives has its risks and finding the best investments in Canada that will suit you will require proper research before proceeding.

How do alternative investments work?

Each type of alternative investment vehicle offers distinct attributes to investors. Generally, alternative investments work by providing investors with a different avenue to put their money into assets beyond traditional stocks and bonds. There are several types of alternative investments, each with its characteristics and strategies. Some focus on growth, while others focus on fixed income.

Benefits of alternative investments

One of the most significant benefits of alternative investments is the potential for higher returns. This is because alternative investments can access niche and emerging markets, such as private equity opportunities in early-stage companies, and employ unique strategies that aim to generate returns regardless of market conditions, such as hedge funds.

For example, alternative investments like the Amur Capital Income Fund (ACIF) have outperformed stocks and bonds for years. Here’s a chart comparing the performance of all three from 1998 to 2023:

Here are additional benefits of investing in an alternative financial asset:

Portfolio diversification

An alternative investment helps in portfolio diversification strategy and asset allocation. By including alternative assets unaffected by the volatility of the traditional public market, investors can have an alternative source of income during market downturns, achieving a more balanced and resilient investment portfolio overall.

Reliable income stream

Alternative investments like Mortgage Investment Corporations (MICs) generate contracted cash flows from their borrowers. And although these contracts are mostly short-term (1 to 2 years), they are often laced with an attractive spread structured to grow with inflation. Moreover, they are invested across different real estate markets in Canada, ensuring mortgage investors a diversified yet stable income stream.

Hedge against inflation

Traditional balanced portfolios comprising stocks and bonds are often exposed to inflation risks. With higher prices comes slower consumer spending and overall lower economic growth, which may affect some of the biggest companies on the stock market, leading to a weak stock market performance.

In contrast, tangible assets like real estate tend to increase their value over time and can spike in inflationary periods. Property values rise with inflation as fewer buildings are developed due to the rising cost of construction-related products.

Potential drawbacks of alternative investments

Barriers to entry

Some alternative classes may have higher minimum investment requirements than traditional investments. You may have to pay higher management fees to invest in hedge funds since they require more complex work from the fund managers.

Illiquidity

Most alternative investments are less liquid than traditional investments and tend to have longer investment cycles because they are not traded on public exchanges. You can’t liquidate your holdings at short notice the way you can with investments like stocks. Hence, investors must gauge their time horizon when evaluating alternative investment solutions to fit their investment goals and objectives.

High risk

Aside from the liquidity risk, alternative investments may have less transparency regarding valuation and portfolio holdings, especially with hedge funds and startup venture funds.

Types of alternative investments in Canada

1. Private equity

Private equity refers to investments in companies with the goal of acquiring ownership stakes, building them up to increase their value, and ultimately selling the company at a profit. Private equity investments can be divided into several types, including:

  • Venture capital, which refers to investments made in a start-up.
  • Growth equity, which focuses on an established and growing company.
  • Buyouts, where a mature, public company is taken private or bought by another private firm.

2. Hedge funds

Hedge funds are pooled vehicles invested in various markets and securities to generate diversifying returns across different market conditions. Some of the most common hedge fund strategies include global macro, where portfolio managers employ computer models to evaluate and predict market movements across the globe before making their buy and sell decisions, and event-driven, where portfolio managers look to capitalize on corporate events such as mergers and acquisitions.

Unlike mutual funds, where you can invest actively or passively, hedge funds are a more active approach since the fund manager actively tracks and adjusts a portfolio based on the strategies employed.

3. Commodities

Commodity investments include natural resources, such as oil, natural gas, gold, and agricultural goods. Commodities, along with real estate, are one of the oldest types of investments. They follow the trend of supply and demand instead of public equity markets, which means higher demand tends to result in higher prices and, in turn, higher profit for investors.

4. Real Estate Investment Trusts (REITs)

Most people associate real estate investments with leasing, buying, and selling properties. But there are also alternative investments in the real estate industry that don’t require owning physical properties and tapping into the growing potential of private markets.

Real Estate Investment Trusts (REITs) allow investors to earn dividends by investing in companies that buy, own, or operate the real estate themselves. REITs are commonly listed on the public stock exchanges and typically own a majority of real estate holdings through equity (own properties and collect rent from tenants).

5. Mortgage Investment Corporations (MICs)

Mortgage investment corporations (MICs) pool money from investors and invest it in mortgages. When you invest in a MIC, you become a shareholder of the company, allowing you to benefit from the MIC’s income in the form of dividends.

The most significant differentiation between REITs and MICs is where the pooled funds go. For REITs, they invest in income-generating properties such as apartments, hotels, and retail centres, along with the ability to develop infrastructures. This dramatically increases the market and property risks against REITs.

MICs, on the other hand, only invest in different types of mortgages. Because they are secured against collateral, MICs are not subject to risks that typically come with owning physical properties. In addition, since mortgages have a defined interest rate and period, MICs can provide a consistent and predictable cash flow compared to REITs.

The role of alternative assets within an investor’s portfolio

Alternative investments should be viewed as complements, not substitutes, to traditional asset classes. More than selecting which of the two to invest in, investors should find the right balance of asset classes, including fixed-income equities and alternative investment products, to diversify their portfolio and protect their investments during market downturns.

Are alternative investments a good idea?

Alternative investments are not for everyone. These alternative asset classes have the benefits of lower volatility, enhanced return, and portfolio diversification while having illiquidity risk and high barriers to entry. However, with careful investment planning, alternative investments can be a strategic and rewarding component of a well-rounded investment strategy.

Why consider MICs over other investments

Unlike traditional investments like stocks and bonds, there’s an opportunity for greater risk-adjusted returns with MICs. At Amur Capital, each of the MIC funds is tailored to suit a variety of investors’ risk tolerances and a focus from conservative, balanced, to high growth. Plus, our MICs have low correlation to the public market, which may result in better downside protection during market stress and inflationary periods.

Amur Capital’s MIC funds are also advantageous over other alternatives like hedge funds and private equity in terms of stability of income and focus on capital preservation. Unlike hedge funds that can be volatile and inconsistent, Amur Capital’s MIC offerings provide a stable source of income through monthly dividends.

Moreover, our MIC funds offer diversification just like REITs, but with easier access to returns from the real estate market due to a focus on lending and generating interest on mortgages rather than constructing and managing rental properties.

Diversify with Amur Capital MICs

Amur Capital comprises a dedicated investor relations team that provides the administrative work needed to determine suitability while delivering excellent service to clients. Our fund offerings include professional fund managers who carefully select secured mortgages placed on residential and commercial properties, so you can rest assured that your investment is primed for success, regardless of market conditions.
So, whether you are a new investor looking to diversify your portfolio or a seasoned investor seeking to refine your investment strategy, consider adding Amur Capital’s MICs to your portfolio today.

Frequently Asked Questions

The most common alternative investments are private equity (venture capital), hedge funds, commodities, and real estate (REITs and MICs).

All investments carry their risks and rewards. Alternative investments have the risk of illiquidity, complexity and a high entry barrier while having a more significant return profile than traditional assets.

Choosing the best alternative investment is not a one-size-fits-all scenario; what works for one investor may not be ideal for another.

Although most investors consider real estate, private credit, and venture capital some of the best alternative investments in the market today, the best investment is the one that suits your unique financial circumstances and aligns with your overarching investment objectives.

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