Diversification within alternatives is becoming more important, but investors still see new opportunities this year.weiyi zhu/iStockPhoto / Getty Images
In a year that has already seen geopolitical fireworks alongside fears of an artificial intelligence bubble, some investment experts are calling for broader diversification across both public and private markets.
AGF Capital Partners Inc.’s outlook report for private markets and alternatives says AI-driven concentration risk is a threat not only to portfolios tilted to tech stocks but increasingly in private markets as well.
Private funds in infrastructure, private equity and private credit are increasingly exposed to AI, the report says, so investors need to diversify across underlying strategies as well as asset classes.
“That makes diversification a more nuanced exercise,” said Ash Lawrence, the head of Toronto-based AGF Capital Partners, in the report.
For Scotia Global Asset Management’s Wesley Blight, that means providing clients with exposure to a highly diversified portfolio of roughly 1,000 direct, individual loans that are backed by reliable, fundamentally strong borrowers.
Mr. Blight, vice-president and portfolio manager on Scotia GAM’s multi-asset management team in Ottawa, is focused on expanding senior, secured direct lending this year as both a portfolio diversification tool to traditional bonds and as an insurance policy against volatility in public markets.
“That’s very intentional – we’re focused on diversification and downside protection, not concentrated bets,” he says.
Expanding Scotia GAM’s private equity offerings is another priority amid public equity concentration concerns, he says. “We’re not making a big leap into [private markets], but scaling deliberately, with private credit coming first and private equity increasing over time.”
AGF Capital Partners cautions that returns across both private equity and private credit could be lower this year, as more competition from banks in the lending market leads to tighter spreads on credit. Still, there are many opportunities in North America and elsewhere, with companies looking to borrow $100-million or less, the report says.
While renewed U.S. trade uncertainty is potentially chilling private equity deal flow, it says, defence spending is a potential bright spot.
“Both geopolitical pressures and rapid technological change are driving long-term, secular growth across the defence and security landscape,” the report says. “We believe these shifts align well with private capital’s ability to fund innovation, positioning the sector for a multi-year expansion.”
Liquid alternatives
While private market vehicles typically require clients to commit capital over longer investment horizons, David Popowich, portfolio manager and advisor with Popowich Karmali Advisory Group at CIBC Woody Gundy in Calgary, says liquid alternatives will play an important role in augmenting cash-flow-oriented portfolios.
Both U.S. and Canadian monetary policy is expected to remain flat through much of 2026, he says, making conventional government bond returns less attractive, so he’s replaced some fixed income and cash with alternatives.
“But we’re very clear on what that means,” Mr. Popowich says. “We’re talking about liquid alternatives – vanilla long-short, option-based and multi-asset strategies – not private structures that lock clients in.”
The illiquidity that often comes with private market allocations can conflict with the needs of clients drawing predictable cash flow, he says, adding he relies on liquid alts to also help smooth out returns.
“We stick to liquid alts. They allow us to manage volatility without introducing the complexity and illiquidity that can become a real problem when markets turn,” he says.
Brett Gustafson, associate portfolio manager at Purpose Investments Inc., is also seeking premium-yield strategies because he expects lower fixed-income returns.
“Income-oriented and tactical alternative strategies play a much more important role now, especially for advisors who are underweight bonds but still need portfolio stability,” the money manager in Calgary says.
Growth in the retail channel
AGF Capital Partners says the introduction of more “evergreen” or open-ended private market funds – designed to provide more liquidity than traditional closed-end funds – will draw interest from retail investors.
While it says that’s a good thing, evergreen funds “can create challenges when investors don’t fully understand how they work or what they’re trading off,” and the lack of liquidity may catch some investors by surprise.
That’s why Anna Hillberry, wealth advisor and portfolio manager with the Hillberry Group at National Bank Financial Wealth Management in Duncan, B.C., says alternatives are viewed as a non-core option for select clients rather than a universal solution.
“Alternatives are like fashion – we see these fads come and go,” she says. “Right now, everyone wants to talk about private equity and private credit, but for the average investor, especially retirees, we actually steer clear.”