Liquid Alternative Products (LAP)
PALs offer advanced diversification by providing access to non-traditional investment strategies — short selling, derivatives and leverage — while maintaining the day-to-day liquidity of a mutual fund.
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What is a LAP?
Liquid alternative products (LAPs) represent an asset class that differs from traditional investments such as mutual funds classic. These funds adopt advanced investment strategies to seek returns uncorrelated with traditional markets — that is, performance that does not depend directly on the direction of the stock markets.
Since the regulatory changes of January 2019, Canadian investors have had access to these strategies, formerly reserved for institutional investors and hedge funds, in an accessible format and with daily liquidity.
Decorrelation
Returns potentially independent of stock market direction
Daily liquidity
Buying and selling on a daily basis, unlike traditional alternative funds
Advanced Strategies
Short selling, derivatives and leverage to diversify sources of return
Strategies used by PALs
Short sale: Unlike mutual funds While traditional investors can only bet on rising stock prices, short sellers can also profit from falling prices by short selling. This allows them to generate returns even in a bear market.
Use of derivatives: PALs can use options, futures contracts and other derivative instruments to hedge risks, amplify returns or access specific markets efficiently.
Leverage : By borrowing to invest more than their available capital, PALs can amplify potential returns. Leverage is regulated in Canada to limit risks.
Long/short strategies: Combining buy (long) and sell (short) positions to reduce net market exposure while capturing performance gaps between securities.
Tips
Investment portfolio management (IPM) funds in Canada are regulated by the Canadian Securities Administrators (CSA). These funds must adhere to strict limits on leverage, concentration, and the types of strategies permitted—providing a framework for investor protection.
Why add PALs to your portfolio?
Advanced diversification: The PALs provide access to sources of yield not available in the mutual funds traditional methods. This decorrelation can reduce the overall volatility of your portfolio.
Protection in a bear market: Through short selling and hedging strategies, PALs can potentially limit losses or even generate gains when traditional markets fall.
Absolute return: Unlike traditional funds that measure their success against a benchmark index, many PALs aim for an absolute positive return, regardless of market conditions.
Natural supplement: The PALs do not replace the mutual funds, the Segregated funds or the GICs — they complement them by adding an additional dimension of diversification.
Associated risks
Like any investment, PALs carry risks. The use of advanced strategies such as leverage can amplify gains, but also losses. The complexity of these strategies can also make these products more difficult for some investors to understand.
That is why it is essential to fully understand how each LAP works before investing, and to ensure that this type of product is suitable for your risk tolerance and financial objectives.
For whom are PALs suitable?
Investors seeking diversification: You already have a portfolio of mutual funds and wish to reduce the correlation with traditional markets.
Experienced investors: You understand financial markets and are comfortable with more complex strategies.
Volatility Protection: You want a buffer in your portfolio for periods of market turbulence.
Eligible accounts
PALs can be held in a TFSA, an RRSP, a RRIF or a unregistered account.
Costs and considerations
PALs generally have management fees (RFG) that can be comparable to or slightly higher than those of mutual funds traditional, due to the complexity of the strategies employed. Some PALs may also include performance fees linked to the returns generated.
Everything you need to know about PALs
PALs are investment funds that use alternative strategies (short selling, derivatives, leverage) to seek returns uncorrelated with traditional markets, while offering daily liquidity.
PALs offer additional diversification with returns that are potentially uncorrelated with stocks and bonds. This can reduce overall volatility and provide protection during market downturns.
Like any investment, PALs carry risks. The use of advanced strategies such as leverage can amplify both gains and losses. It is essential to fully understand these risks.
Mutual funds primarily invest in stocks and bonds using long-only strategies. Equity-only portfolios (EOPs) may use short selling, derivatives, and leverage to seek market-independent returns.
Yes, that's what distinguishes them from traditional hedge funds. PALs are structured to offer daily liquidity, allowing you to easily buy and sell your shares.
No, PALs are better suited to investors with a good understanding of the markets and an appropriate risk tolerance. An advisor can assess whether PALs are right for you.
PALs can be held in a TFSA, RRSP, RRIF or a non-registered account — the same accounts as traditional mutual funds.
PALs have management fees comparable to or slightly higher than mutual funds, due to the complexity of their strategies. Some also include performance fees.
Yes, PALs have been regulated by the Canadian Securities Administrators (CSA) since January 2019. The funds must adhere to strict limits on leverage and permitted strategies.
No, PALs are a complement to mutual funds, segregated funds, and GICs—not a replacement. They add an extra layer of diversification to an existing portfolio.
Broaden your investment horizon
PALs add an advanced diversification dimension to your investment portfolioOur advisors can assess whether these products match your profile and objectives.
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