Algonquin Capital Corp. is wading into the nascent market for liquid alternatives in Canada, launching a hedge fund-like mutual fund that’s available to retail investors.

The firm is planning to raise as much as C$3 billion ($2.3 billion) over the next three to five years for the credit fund, adding to its C$450 million in assets under management, partner Brian D’Costa said.

“We want to be a true active manager, which means having the ability to do security selection, run concentrated positions and using leverage and shorting securities,” D’Costa said in an interview at Algonquin’s Toronto-based offices. “Then we will put a levered short Canada investment-grade overlay on the fund which should give investors a 100 to 150 basis points yield enhancement.”

So-called liquid alts -- which encompass everything from hedge funds to real estate, private debt and equity and infrastructure -- are taking off as investors chase higher yields outside those offered by traditional bonds. Investments have reached about $882 billion, including about $47 billion in exchange traded funds, according to Greenwich Associates.

A year ago, regulators cleared the way for the mutual funds in Canada. A total of 37 funds from 15 companies had been launched by July, with assets reaching C$3.4 billion, according to a report by the Canadian Imperial Bank of Commerce.

Rubbish Funds
Unlike typical hedge funds, investors can take money out on a daily basis. They’re often more transparent and cheaper than the 20% performance fee that hedge funds typically carry.

Algonquin’s fund has no performance fee. The first C$50 million in investments will pay a 50-basis point management fee and after that the fund will charge 95 basis points.

“Other funds are doing a light version of a hedge fund and we’re really building a much enhanced version of a normal bond fund,” D’Costa said. “We really want it to replace all the rubbish bond funds that are out there where people have added all kinds of other risks to to enhance yields.”

Algonquin will focus on purchasing North American investment-grade corporate bonds while shorting government notes to leverage lower risk positions. Leverage will typically be about 2.25 times.

5% Yield
The goal is to get a 5% yield, without an enormous amount of high-yield debt and staying away from emerging markets, commodities and currency risks. Bond maturities will typically be four years, which brings the interest-rate risk down, portfolio manager Alex Schwiersch said.

“A traditional bond fund is going to return 3% to 3.5% a year if you’re lucky over the cycle. And you’re going to have to take a lot of risks, a lot of duration, to do that,” Schwiersch said. “We can offer a product that, even though it’s a liquid alternative, it’s going to behave more like a bond fund.”

Up to 6% of Algonquin’s new fund, which launched this week, could be held in a single asset. It expects to invest in a broad range of sectors including financials, communications, consumer products, energy, health care, industrials, infrastructure, real estate, technology and provincial bonds in Canada and the U.S. Typically around 25% of the fund may be invested in non-investment grade credits.

This article was provided by Bloomberg News.