Some investors are adopting liquid alternative funds for downside protection in volatile markets.SusanneB/iStockPhoto / Getty Images
Liquid alternative investments are becoming a mainstay of Canadian portfolios, with investors pouring a whopping $23.6-billion into the asset class last year – almost triple the $8.6-billion invested in all of 2024.
Data from Morningstar Canada show there’s $60.6-billion invested in liquid alt mutual funds and exchange-traded funds (ETFs), a 30-per-cent growth rate for the year, which is “substantial,” says Ian Tam, director of investment research for Canada at Morningstar Inc. At the end of 2024, $46.5-billion was invested in liquid alts.
“It’s still a pretty small market,” he says, considering there’s more than $2.5-trillion invested in Canadian mutual funds, but “it’s not going away.”
The leading category was equity-focused liquid alternative funds, pulling in $6.4-billion last year, while the broad “other” category – which includes funds that invest in cryptocurrencies – added $6.3-billion. Credit-focused funds were next at $4.3-billion, and multi-strategy funds pulled in $3.3-billion.
Investors also had a raft of new choices with 128 new liquid alt funds in 2025, up from 46 in 2024. A large number of single-stock ETFs that use leverage and covered calls contributed to that high figure, Mr. Tam notes.
Several liquid alt funds pulled in $1-billion or more last year, Mr. Tam says. Dynamic Premium Yield PLUS Fund drew $2.1-billion in flows, with RP Alternative Global Bond Fund next on the list with $1.3-billion. Scotia Wealth Tactical Asset Allocation PLUS Pool and Harvest Diversified High Income Shares ETF HHIS-T each pulled in more than $1.2-billion, according to Morningstar data.
Mark Brisley, head of Scotia Global Asset Management’s Dynamic Funds, says alternatives are catching on because of what they can do for the overall portfolio in terms of risk-adjusted returns and downside protection by using options and moderate leverage.
Dynamic Premium Yield PLUS Fund provides U.S. equity exposure with options writing for reduced volatility.
“What you’re ultimately getting is diversification benefits provided by options writing with a low correlation to bonds and interest rates,” he says. “[That] emphasis on lowering downside exposure has been really popular with clients.”
As regulations allowing liquid alts to be offered came into effect in January, 2019, Mr. Brisley says the knowledge gap has narrowed, and more advisors and investors understand how to use these investments effectively in their portfolios.
He says advisors are looking for “diversification, risk management and access to alternative return streams in a liquid format for their portfolios,” which can be harder to get with a traditional 60 per cent equity, 40 per cent bond portfolio. “That’s why liquid alternatives have truly become a third asset class.”
Growth in single-stock ETFs
Single-stock ETFs took off in 2025, led by Harvest Diversified High Income Shares ETF, which launched in January and pulled in more than $1.2-billion. The ETF invests in Harvest Portfolios Group Inc.’s suite of U.S. single-stock ETFs, which are listed in Canada and use a covered-call strategy and leverage of about 25 per cent to provide both monthly income and growth potential.
Harvest ETFs offers 19 U.S. single-stock ETFs and plans to launch six more in 2026, says Paul MacDonald, the firm’s president and co-chief investment officer. “Where we’ve seen the largest growth is, unequivocally, within our single-stock franchise.”
Harvest ETFs also has 10 Canadian single-stock ETFs.
This “equity income strategy” is core to Harvest ETFs’ business, he says, as investors want exposure to underlying stocks for long-term growth but need the cash flow.
What’s ahead for 2026
Depending on how markets perform next year, it’s likely investors will turn to liquid alts as an option, says Daniel Straus, managing director of ETF research and strategy at National Bank Financial.
If “some of the air comes out of these AI valuations,” then certain products such as equity market-neutral strategies will probably do well, he says, as well as multi-strategy or multi-asset funds.
With the macroeconomic situation predicted to be similar in 2026, Mr. Brisley says he expects continued growth in liquid alt investments “but in a more focused and sustainable way.”
He also expects more products to come to market, particularly multi-strategy, one-ticket solution funds, and those using options-based strategies.
“Market expectations are a major driver of how investors are allocating to liquid alts,” he says.
If investors feel inflation will persist, and bond and equity markets will be more volatile, then “liquid alts are going to continue to become a really valuable tool for adding uncorrelated exposures,” he says.