Alternative funds see big jump in flows in first half of 2025

Investors chose liquid alternative investments increasingly in the first half of 2025 as they sought to diversify and protect portfolios from volatile markets.

Ian Tam, director of investment research for Canada at Morningstar Inc., says almost $9-billion flowed into liquid alternative mutual funds and exchange-traded funds (ETFs) in the first half of 2025. A whopping $6.1-billion was invested in the first quarter of the year alone – more than double the inflows of any previous quarter since liquid alts came to market in 2019.

“When this whole category launched, we saw pretty standard flows, but the last two quarters really exploded,” Mr. Tam says.

This year’s first-half flows already exceeded inflows from any previous year, according to Morningstar.

By the end of June, the liquid alternative market of mutual funds and ETFs in Canada totalled $38.4-billion. The total mutual fund and ETF market in Canada is about $2.6-trillion, Mr. Tam says, so alternatives are “a small sliver, but it’s growing.”

People are citing different reasons for investing in alternatives, he adds, including cash flow and the funds’ lack of correlation to public markets.

Sara Petrcich, head of ETFs and alternatives at BMO Global Asset Management, says alternative funds gained traction after both stocks and bonds fell in 2022, shaking investor confidence.

The demand for alternatives is tied to the current market uncertainty, she says, as investors search for solid returns amid the market volatility caused by tariffs and the global trade war.

“These alternative strategies, whether it’s a liquid alt or a private alt – they do offer downside protection in the form of the strategies these managers design,” she says.

Ian Bragg, vice-president of research and statistics at the Securities and Investment Management Association, says credit strategies were the dominant alternative category for mutual fund sales in the first half, while growth on the ETF side was driven by cryptocurrency and single-stock funds, most of which employ leverage or covered calls.

Alternative funds accounted for 26 per cent of mutual fund sales in the first half of the year, Mr. Bragg says, while liquid alt ETFs made up about 4 per cent of total ETF sales in the first half.

Mr. Tam of Morningstar says balanced funds have also contributed to growth in alternatives. Almost one-third of balanced funds held alternative investments at the end of 2024, according to Morningstar, with an average allocation to alts of 3 per cent.

Performance has been relatively steady across the range of liquid alternative asset funds, which includes alternative credit and equity, market neutral, multi-strategy, and private debt and equity. The average one-year return is 7.4 per cent, the three-year average is 8.1 per cent, and the five-year average is 6.7 per cent, according to data from Morningstar.

New fund options

Asset managers launched 12 new liquid alternative funds this year, according to Morningstar, and there have been no closures since 2022.

The new products released in the first half included strategies ranging from alternative credit to private equity secondaries to hedge fund strategies, such as long/short and leverage.

Two of the products launched this year were among the top liquid alternative funds for inflows, according to Morningstar.

1832 AM Tactical Asset Allocation PLUS Pool from 1832 Asset Management LP topped all funds for inflows, bringing in $1.3-billion. The fund uses a tactical asset allocation approach across equity, fixed income and currencies, taking long and short positions.

Another new fund, Canada Life Global Opportunities+ Fund, ranked third in net flows, bringing in almost $924-million since its launch in February. The fund also invests in various asset classes and uses derivatives and short-selling to generate returns.

Other alternatives benefit from the investment climate

Investors are turning to alternative assets for portfolio diversification and to pick up yield, says Stephen Johnston, a private equity manager director at Omnigence Asset Management, which manages about $1-billion in farmland and private equity investments. That’s happening more as investors get older and are looking for a stable portfolio that provides regular income, he adds.

“The demand is there, and you’re seeing the growth of a very robust alternative industry in Canada,” he says.

Last month, BMO Global Asset Management launched Alpha Managers Hedge Fund, a multi-strategy hedge fund subadvised by Goldman Sachs Asset Management targeted at accredited investors. The fund uses long-short, quantitative and factor-based strategies, among others.

Ms. Petrcich says the fund aims to be a portfolio diversifier, offering downside protection and a smoother ride. “It’s looking to give investors access to that safer feel in volatile times.”

Different alts for different times

Alternative investments have changed with the times, Mr. Johnston says. They used to mean investing your money for years with no liquidity options, no interim cash flow, and no secondary market, which doesn’t work for the average retail investor, he says.

Now, funds have lower investment minimums, shorter holding periods, liquidity options and a secondary market. However, Mr. Johnston says investors still need to ensure the underlying assets in the fund are liquid enough for their needs.