Fidelity’s Biggest Allocation Series Ventures into Alternative Investments

Many Canadian allocation funds have added alternative investments to their portfolios, especially since stocks and bonds both plunged by double digits in 2022. That made the alternatives’ promise of returns that don’t correlate with equities or fixed income more enticing. The most prominent test of whether they will live up to that promise is getting underway at Fidelity.

In May, Fidelity announced that its largest allocation series, the Fidelity Managed Portfolios, will invest in three alternative strategies: Fidelity Global Value Long/Short, Fidelity Market Neutral, and Fidelity Long/Short Alternative. With 40 billion CAD under management, this will be the largest group of retail allocation funds from one provider in Canada to include alternatives. Two of the options rank among the top five largest Canadian allocation funds with alternatives.

Not all alternative funds are the same, and the choice of three marks a difference between Fidelity and others. Many funds opt for smaller allocations to private assets like direct real estate or private credit. Such investments offer little liquidity and lower frequency of reporting. In contrast, the three alternative strategies in the Managed Portfolios buy and short public stocks, which makes them more liquid and easier to evaluate on a day-to-day basis. Morningstar wrote about the wide variety of alternative strategies in its 2024 Diversification Landscape report.

Fidelity thoughtfully made room for these three strategies. It used the portfolios’ cash stakes to buy Fidelity Market Neutral Alternative because the fund attempts to post a modest return unattached to where equities go. Fidelity Long/Short Alternative doesn’t shy from equity exposure, so the firm considers it part of the series’ stock allocation. Meanwhile, Fidelity Global Value Long/Short tries to zig when stocks zag, so Fidelity’s global asset allocation team drew from the portfolios’ helpings of cash and Fidelity Canadian Large Cap, whose manager, Dan DuPont, also runs Global Long/Short.

However, the new additions have their risks. The strategies invest in stocks, but they all do at least some shorting–betting that a stock will fall by borrowing and selling shares, then buying them back at a lower price. Shorting can be profitable when a stock falls but ruinous if they keep rising. Indeed, you can lose much more shorting than you can on a long position; a stock can only fall to zero but can theoretically climb to infinite, which would be very bad for an investor who stubbornly stuck to a shorted stock. As such, risk management is paramount in strategies that short, and in alternative strategies in general. They must know when to cut their losses.

Competitors will be watching how Fidelity’s foray into alternatives in its allocation funds turns out. If it works, they may add or boost the positions alternatives have in their own allocation offerings. Fidelity’s global asset allocation team has made good tweaks in the past, and these additions seem reasonable.

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