Alternative mutual funds

Recently, the Canadian Securities Administrators made changes to the rules to set up clear guidelines for the selling of alternative mutual funds in Canada.  The new rules will come into force on January 3, 2019, subject to ministerial approvals.

The purpose of this article is to provide investors with useful information about alternative mutual funds as these are new products that will be available to retail investors.

What are alternative mutual funds?

Alternative mutual funds are a type of mutual fund. Like a conventional mutual fundMutual fund An investment that pools money from many people and invests it in a mix of investments such as stocks and bonds. A professional manager chooses investments that match the fund’s goals for risk and return. You can redeem your fund units at any time.+ read full definition, an alternative mutual fund is a collection of investments owned by a group of investors and managed by a professional money manager.

However, alternative mutual funds can investInvest To use money for the purpose of making more money by making an investment. Often involves risk.+ read full definition in non-traditional investmentInvestment An item of value you buy to get income or to grow in value.+ read full definition assets or use complex investment strategies in ways that conventional mutual funds cannot. For example, an alternative mutual fund can invest in physical commodities without restrictions, use derivatives, short-sell securities, or borrow cash for investment purposes.

Similar to conventional mutual funds, you will receive a summary document known as Fund FactsFund Facts A user-friendly guide that provides key information about a mutual fund including fees and performance. Mutual fund companies are required to give investors a copy of Fund Facts before they decide to purchase a fund.+ read full definition at the time of buying the fund if the alternative mutual fund is not listed on an exchange. If the alternative mutual fund is listed on an exchange, you will receive an ETF Facts within two business days after you buy the fund.

Alternative mutual funds also have similarities to hedge funds in some respects. Both can invest in non-traditional assets or use complex strategies like short-sellingShort-selling A way to make money on an investment that you believe will drop in value. You borrow shares of a stock and then sell them right away. When the price drops, you buy the shares back at a lower price and return them to the original owner.+ read full definition or use derivatives to meet the funds’ investment objectives. However, not everyone can invest in hedge funds. Only investors that qualify as accredited investors can invest in hedge funds. On the other hand, everyone can invest in alternative mutual funds.

Mutual Funds, Alternative Mutual Funds and Hedge Funds – A Quick Comparison

Conventional Mutual Funds Alternative Mutual Funds Hedge Funds
Invest in non-traditional assets (For example: gold, oil, real estateEstate The total sum of money and property you leave behind when you die.+ read full definition) Limited Yes,

although limited to commodities

Complex, high-risk strategies (For example: use of derivatives, short positions) Limited Yes,

with restrictions

Issuance of prospectusProspectus A legal document that sets out the full, true and plain facts you need to know about a security. Contains information about the company or mutual fund selling the security, its management, products or services, plans and business risks.+ read full definition Yes Yes Exempt
Issuance of Fund Facts or ETF Facts Yes Yes Exempt
Delivery of Fund Facts or ETF Facts Deliver Fund Facts at the time of buying the fund

Deliver ETF Facts within two business days after buying the fund

Not Applicable

Things to be aware of before you invest

1. Investment objectives

Depending on the fund’s investment objectives, some funds may use complex strategies to beat the market. Other funds may spread the investments across traditional assets such as stocks or bonds and non-traditional assets such as gold or oil to manage risk through diversificationDiversification A way of spreading investment risk by by choosing a mix of investments. The idea is that some investments will do well at times when others are not.+ read full definition. Before choosing an alternative mutual fund, consider whether the fund’s investment objectives meet your investment objectives and needs.

2. Investment strategies

Alternative mutual funds can use leverageLeverage A way to make a larger investment by using borrowed money to invest. The more you invest, the more money you can make. But if things don’t work out, you will have bigger losses.+ read full definition to meet their investment objectives. For example, funds can borrow cash or short-sell securities or use derivativeDerivative An investment that is based on a contract that gives you the right to buy and sell at set prices. Value is based on performance of an underlying financial asset, commodity or other investments. Examples: Futures, options and swaps.+ read full definition transactions. Use of leverage can increase the riskiness of the investment. Ask your financial representative questions about the fund’s investment strategies and how they could impact the fund’s investment returns.

3. Fees

Fees can reduce the return you earn on your investment. Like hedge funds, you are more likely to see alternative mutual funds charging a performance fee in addition to other types of fees. Talk to your financial representative to understand the impact of fees on the fund’s investment returns.

4. Performance

Although past performance does not tell you how the fund will perform in the future, it is important to review the performance of the fund. If the fund is new and has limited performance history, try to find out as much information as possible from your financial representative about the mutual fund companyMutual fund company An investment company that pools money from investors and invests it in a mix of investments, such as stocks, bonds, and money market investments. Most mutual fund companies offer a choice of more than one fund.+ read full definition and the fund managerFund manager A fund manager is responsible for investing the pool of money that people have put into the fund. The manager chooses investments that match the fund’s goals for risk and return.+ read full definition’s education and experience.

Take action

Financial representatives that sell mutual funds, including alternative mutual funds are required to be registered with the provincial securities regulators. Check registrationRegistration A requirement for any person or company trading investments or providing advice in Canada. Securities industry professionals are required to register with the securities regulator in each province or territory where they do business.+ read full definition through the Ontario Securities Commission or Canadian Securities Administrators.

For more information

  1. Read more about how mutual funds work.
  2. Find out more information about hedge funds.
  3. Read more about Fund Facts. You can also use our interactive Fund Facts tool.
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