Access is being unlocked for hedge funds, which can help address many core client needs.GETTY IMAGES
Hedge funds have long been a cornerstone of Canadian institutional portfolios as pension plans and other large asset owners use them to smooth returns, manage risk and navigate volatile markets. Yet, for many financial advisors and their clients, these funds have sat just outside the core portfolio toolkit: complex, expensive and, at times, difficult to access.
That may be changing as a growing number of funds and strategies are opening to more investors. Moreover, as advisors contend with persistent volatility, higher interest rates and growing concerns about liquidity in private markets, hedge funds are being reframed as practical tools for solving real client needs.
“Hedge funds used to be kind of a beat-the-market bucket. Today, they’re much more about solving specific outcomes – downside protection, income and liquidity,” says Jeffrey Johnstone, senior wealth advisor with Johnstone Wealth at National Bank Financial Wealth Management in Toronto.
That shift is especially relevant for advisors working with high-net-worth and accredited investors, for whom portfolio construction is less about maximizing returns and more about preserving capital, managing drawdowns and maintaining flexibility.
According to the Alternative Investment Management Association (AIMA), hedge funds’ value proposition has evolved. Many investors are now prioritizing consistency, capital preservation and the ability to navigate complex macro environments over pure outperformance. For many advisors, that aligns closely with the conversations they’re having increasingly with their clients.
“Our clients have lived through [the global financial crisis of] 2008, COVID-19, [the market decline in] 2022 – periods in which correlations broke down,” Mr. Johnstone says. “Fixed income didn’t protect you in a rising interest rate environment. So, the question becomes, what can?”
Hedge funds, with their ability to generate returns independent of market direction, offer one answer. The range of approaches available demands a close look at the suitability for each client, says Ben Kizemchuk, senior investment advisor and portfolio manager with Stonehaven Wealth Management at Wellington-Altus Private Wealth Inc. in Aurora, Ont.
“Hedge funds are such a large asset class, with many different strategies,” he says. “You really have to understand where there is a good fit for a client, and whether they have the liquidity and risk tolerance to support it.”
That fit is becoming easier to achieve. The rise of liquid alternatives – prospectus-based vehicles offering hedge fund-like strategies – has made these approaches more accessible to retail investors, transparent and cost-efficient than in the past.
It has also shifted how advisors think about their role in the portfolio. Recent survey data from AIMA points to diversification as the primary reason investors allocate to hedge funds, followed by uncorrelated returns and capital preservation.
“These strategies don’t necessarily rely on markets going up to make money,” Mr. Kizemchuk says. “That’s a key differentiator, especially when you’re concerned about public market risk.”
He points to strategies such as merger arbitrage and multi-strategy funds, in which returns are driven by corporate events or relative value opportunities rather than broad market direction. Such approaches are difficult for individual investors to replicate on their own.
The experience of 2022, when equities and bonds fell in tandem, highlighted the limits of relying solely on public markets. For many advisors and their clients, the result was a renewed focus on strategies that could steady the ride without sacrificing return potential. That’s where hedge funds are increasingly being deployed.
“We use them as a tool to provide a dampener on volatility and solve specific client outcomes,” Mr. Johnstone says.
Just as important is how they compare to other alternative investments, notably private markets. The rapid growth of private equity and private credit has introduced a new challenge for advisors: illiquidity. Redemption restrictions and gating have become more visible, especially among retail and high-net-worth investors who may not have fully appreciated the constraints of these structures.
In contrast, hedge funds often offer more frequent liquidity (monthly or quarterly). That allows advisors to rebalance portfolios, manage cash flows and respond to changing market conditions.
Such flexibility positions hedge funds as a natural complement to private market allocations. For advisors building portfolios that include both liquid and illiquid assets, hedge funds can help bridge the gap, providing exposure to alternative strategies without sacrificing adaptability.
“The ability to say to a client, ‘You can get out of this [investment],’ is a very attractive feature,” Mr. Johnstone says.
Still, the use of hedge funds is far from one-size-fits-all. He says allocations typically range from 5 per cent to 30 per cent of a portfolio, with many clients clustering around 10 per cent to 15 per cent, depending on objectives, liquidity needs and overall portfolio structure.
For Mr. Kizemchuk, the emphasis is on long-term, strategic positioning, particularly for clients with sufficient liquidity elsewhere.
“This is not something I’m trading month to month. It’s about trusting a manager over multiple cycles.”