“So, the role of alternative products is to try to diversify away from this type of volatility. And, by minimizing your losses, you will increase your returns.
“The reason we use an option is because we have a challenge on the fixed income portion of the portfolio and especially on the equity side of the portfolio these days with interest rates being so low. The equity market is quite volatile and quite high. ,” he said. “So, people want to do some kind of diversification with something else.”
Saborin said most large Canadian pension funds are now exercising options, but there has been increased demand from other investors as well. They are getting more queries from advisors who want to find new solutions for clients, even if interest rates go up a bit, the performance is still not great.
Consultants are looking for the latest solutions, and Saborin said the options offer a wide range. Mortgage funds or private debt funds are good income replacements within portfolios as they generate better and more stable returns. Private equity, real estate and private real estate can also provide better returns than the equity market.
Saborin said there are an increasing number of alternative products to add to portfolios, with some becoming more exclusive or speculative, such as crypto. Options can be traded daily, monthly or even quarterly, and some are liquid. He said long short credit funds are classified as fixed income, but the liquid version which is traded daily has higher leverage than the regular version, traded monthly.