As an asset class, alternative investments have demonstrated their potential to diversify traditional portfolios, reduce risk and enhance returns in all market conditions.

Many investors rely on traditional asset classes like stocks and bonds to help them meet their investment goals. However, the global financial crisis of 2008-2009 demonstrated that many traditional asset classes can, at times, all move together in one direction – down. Today, with stocks continuing to be vulnerable to volatility and a decades-long bull market in bonds possibly coming to an end, investors are increasingly looking to alternative asset classes to help diversify and enhance or protect returns. For many, alternative investments have become an important component of a well-diversified portfolio.

Historically, alternative investment strategies have demonstrated that they can complement and diversify more traditional investments in various market conditions, offering returns that are largely uncorrelated to traditional stock and bond market movements. Examples of alternative investments include venture capital, private equity, hedge funds, real estate, investment trusts and commodities.

Crisis Alpha

Most traditional investment strategies are vulnerable to suffering significant losses during times of market crises. The key to finding true diversification is in accessing an investment which can offer the potential to deliver performance during such negative periods. “Crisis alpha” refers to investment strategies that offer the potential to deliver positive returns during times of financial stress, as illustrated in the following chart. The chart shows a performance comparison between a traditional 60/40 Equity/Bond Portfolio and an Alternative Investment Strategy – the Auspice Managed Futures Excess Return Index, an index that aims to benefit from trends in the commodity and financial markets. As the chart shows, the alternative investment strategy fared much better during this market crisis.

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The historical performance of the Auspice Managed Futures Excess Return Index and of the hypothetical Equity and Bond portfolio is shown for illustrative purposes only. It is only meant to illustrate the effects of the compound growth rate and is not meant to forecast, imply or guarantee the future performance of any particular investment or index, which will vary. The performance results of the Auspice Managed Futures Excess Return Index prior to its inception (11/17/2010) are hypothetical, back-tested daily total returns. The performance data for the index and the hypothetical Equity and Bond Portfolio assumes no management fees, expenses or optional charges as well as the reinvestment of all distributions. Source: Bloomberg, between December 31, 2002 to December 31, 2014. * The Equity and Bond Portfolio consists of a 60.00% weight in the S&P/TSX Composite Index (Total Return) and a 40.00% weight in the DEX Universe Bond Index (Total Return), using the historical returns of the indices.

Who Uses Alternative Investments?

Large institutional and accredited high-net-worth investors have long used alternative investments to manage risk and enhance performance. Today, many large institutional investors have significant allocations* to alternative investments, including:

• Yale Endowment Fund: 73.7% (includes absolute returns, leveraged buyouts, and venture capital)
• OMERS: 48% (private equity, infrastructure and real estate)
• Harvard Endowment Fund: 58.5% (includes private equity, absolute return, real estate and natural resources)
• Ontario Teachers Pension Plan: 41% (includes natural resources, real estate, infrastructure and absolute return)
• CALPERs: 30.6% (includes private equity, real assets, real estate and forestland)

*Based on the latest data available on the respective websites of the organizations listed above, as at December 31, 2016.

An Important Component of a Well-Diversified Portfolio

Non-Correlated Returns
“Correlation” refers to a method of measuring the degree to which two investments move in relation to each other. A perfect positive correlation (expressed as “1”) means that as one investment gains or loses value, the compared investment moves in the same direction. A perfect negative correlation (expressed as “-1”) means that the compared securities move in completely opposite directions. A zero correlation implies no relationship whatsoever.

The chart below provides an illustrative example of the correlations between different categories of investments – including those from the alternative category.

Correlation Matrix

Category Index Name MSDIBHFI DEX S&P 500® AMFERI DBCRUSI
Alternative -
Hedge Fund
Morningstar Broad Hedge
Fund Index
1.0000 0.1325 0.6269 0.1872 0.2661
Bond DEX Universe Bond Index 0.1325 1.0000 -0.5560 0.0870 -0.0131
Equity S&P 500® Index 0.6269 -0.5560 1.0000 -0.1533 0.1932
Alternative -
Managed Futures
Auspice Managed Futures
Excess Return Index   
0.1872 0.0870 -0.1533 1.0000 0.2067
Alternative -
Currency
Deutsche Bank Currency
Returns Index
0.2661 -0.0131 0.1932 0.2067 1.0000
 

Source: Bloomberg, between December 31, 2002 and December 31, 2016. The historical performance of the indicies are shown for illustrative purposes only. It is not meant to forecast, imply or guarantee the future correlation of any particular investment or index, which will vary. The correlations results of the Auspice Managed Futures Excess Return Index a prior to its inception (11/17/2010) are hypothetical, back-tested daily total returns.

The Potential to Improve Overall Performance
As an asset class, alternative investments have demonstrated their potential to diversify traditional equity and fixed-income portfolios, reduce risk and enhance returns in various market conditions. However, investors should not focus on alternative asset classes in isolation. Their full value is demonstrated when used as part of an overall portfolio strategy. Research using back-tested historical market data shows that by combining alternative investments with various portfolios of stocks and bonds, an investor could have improved the overall performance of each portfolio tested, while lowering volatility. Note: In the below hypothetical alternative basket portfolios, allocations have been moved from the Equities and/or Bond components into the Alternatives component.

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  60/40% 5% allocation 10% allocation 20% allocation
Total Return (ann.)* 8.01% 7.75% 7.48% 7.23%
Standard Deviation (ann.) 5.94% 5.58% 5.24% 5.09%
Sharpe Ratio 1.27 1.31 1.34 1.33
 

*Since inception. Inception date of model portfolio is November30, 2009.
Source: Bloomberg, between November 30, 2009 and December 31, 2016. In all the above hypothetical examples, the Equity allocation is represented by a 50% allocation to the S&P 500® Index and a 50% allocation to the S&P/TSX Composite Index. The Bond allocation is represented by a 100% allocation to the DEX Universe Bond Index (Total Return). The Alternative allocation consists of a 25% weight in the Morningstar® Broad Hedge Fund IndexSM, a 25% weight in the Horizons Seasonal Rotation ETF, a 25% weight in the Auspice Managed Futures Excess Return Index and a 25% weight in the Auspice Broad Commodity Excess Return Index with no rebalancing. The Indices are not directly investable. The historical performance of the Auspice Managed Futures Excess Return Index, Auspice Broad Commodity Excess Return Index and the Morningstar® Broad Hedge Fund IndexSM is shown for illustrative purposes only. It is only meant to illustrate the effects of the compound growth rate and is not meant to forecast, imply or guarantee the future performance of any particular investment or index, which will vary. The performance results of the Auspice Managed Futures Excess Return Index and the Auspice Broad Commodity Excess Return Index prior to their inception (11/17/2010) are hypothetical, back-tested daily total returns. Total return does not contemplate commissions, fees, expenses, optional charges or taxes which would have impacted an investor’s return.

Performance

Product Name 1 Month 3 Month 6 Month 1 Year 3 Year 5 Year
60/40% 0.89% 1.11% 4.40% 10.43% 11.10% 8.27%
5% Alternative Basket 0.87% 1.02% 4.09% 9.95% 10.55% 7.83%
10% Alternative Basket 0.84% 0.92% 3.77% 9.47% 9.99% 7.38%
15% Alternative Basket 0.93% 1.22% 4.02% 9.74% 10.00% 7.35%
20% Alternative Basket 0.91% 1.13% 3.71% 9.26% 9.45% 6.91%
 

Source: Bloomberg, between November 30, 2009 and December 31, 2016. In all the above hypothetical examples, the Equity allocation is represented by a 50% allocation to the S&P 500® Index and a 50% allocation to the S&P/TSX Composite Index. The Bond allocation is represented by a 100% allocation to the DEX Universe Bond Index (Total Return). The Alternative allocation consists of a 25% weight in the Morningstar® Broad Hedge Fund IndexSM, a 25% weight in the Horizons Seasonal Rotation ETF, a 25% weight in the Auspice Managed Futures Excess Return Index and a 25% weight in the Auspice Broad Commodity Excess Return Index with no rebalancing. The Indices are not directly investable. The historical performance of the Auspice Managed Futures Excess Return Index, Auspice Broad Commodity Excess Return Index and the Morningstar® Broad Hedge Fund IndexSM is shown for illustrative purposes only. It is only meant to illustrate the effects of the compound growth rate and is not meant to forecast, imply or guarantee the future performance of any particular investment or index, which will vary. The performance results of the Auspice Managed Futures Excess Return Index and the Auspice Broad Commodity Excess Return Index prior to their inception (11/17/2010) are hypothetical, back-tested daily total returns. *Total return does not contemplate commissions, fees, expenses, optional charges or taxes which would have impacted an investor’s return.

Alternative Investments Meet ETFs

Historically, alternative investments have been offered as high-cost strategies not easily accessible to every investor. They were often restricted to sophisticated institutional investors or to accredited high-net-worth investors who meet large minimum capital requirements – in some cases, millions of dollars.

Moreover, many alternative investment funds are relatively illiquid, with long capital lock-up periods or limited purchase/redemption windows. Others lack transparency, using “black box” trading strategies leaving investors guessing at how much risk they are actually taking on. Horizons ETFs has made it easy for all investors, regardless of portfolio size or experience, to gain low-cost exposure to this asset class through highly liquid, transparent ETFs.

Our suite of Alternative Investment ETFs makes it possible for every investor, regardless of experience or portfolio size, to access alternative strategies.

Benefits of using an ETF to gain exposure to Alternative Investments:

• Low cost
• Highly liquid and transparent investments
• Exchange traded
• No minimum investment
• No minimum holding period

The Horizons Suite of Alternative Investment ETFs

Horizons Morningstar Hedge Fund Index ETF (HHF):

Seeks investment results, before fees and expenses, that correspond to the performance of the Morningstar® Broad Hedge Fund IndexSM, hedged to the Canadian Dollar.

• Uses an index replication strategy designed to mimic the overall investment activities and returns of the Morningstar® Broad Hedge Fund IndexSM
• First hedge fund index ETF ever offered in Canada
• Management fee: 0.95%*
• Sub-advisor: National Bank

Horizons Auspice Managed Futures Index ETF (HMF):

Seeks investment results, before fees and expenses, that correspond to the performance of the Auspice Managed Futures Excess Return Index, hedged to the Canadian dollar.

• Can be long or short futures contracts on 21 different futures in five or more broad sectors (e.g., energies, metals, agricultural commodities, interest rates and currencies)
• Seeks to capture upward and downward trending markets
• No equity index exposure and low correlation to equities
• Management fee: 0.95%*
• Sub-advisor: Auspice Capital Advisors Ltd.

Horizons Seasonal Rotation ETF (HAC):

Seeks to deliver long-term capital appreciation in all market cycles by tactically allocating exposure to equities, fixed income, commodities and currencies, T-bills or cash during periods that have historically demonstrated seasonal trends.

• Seasonal rotation involves investing in the market at the times of the year when it typically does well, or investing in sectors when they typically outperform the broad market
• Historically low correlation to broad equity markets
• Management fee: 0.75%*
• Investment Manager: Horizons ETFs Management (Canada) Inc

Horizons Global Currency Opportunities ETF (HGC):

Seeks to generate positive absolute returns through long exposure to select global currencies. To achieve its investment objective, HGC’s sub-advisor selects currencies that are expected to strengthen relative to other currencies, using a proprietary investment model which employs both a fundamental and technical ranking process that tracks a universe of global currencies.

• Gives investors access to the world’s largest securities market, without the margin requirements usually associated with trading currencies directly
• A high level of expertise: HGC’s sub-advisor is one of the largest currency investment teams in North America
• Management fee: 0.55%*
• Sub-advisor: CIBC Asset Management Inc.

Horizons Absolute Return Global Currency ETF (HARC):

Seeks to generate positive absolute returns through long and short exposure to selected global currencies. HARC will generally hold Canadian short-term fixed-income securities and will primarily use derivative instruments to gain its exposure to selected global currencies.

• The only long/short global currency ETF in Canada: HARC gives investors both long- and short-position access to the world’s largest securities market, paired with the expertise of a world-class currency management team
• Non-correlated returns: Currency returns tend to be driven by factors that are distinct from those of traditional asset classes
• Management fee: 0.95%*
• Sub-advisor: CIBC Asset Management Inc.

*Plus applicable sales taxes.

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Horizons ETFs is a Member of Mirae Asset Global Investments. Commissions, trailing commissions, management fees and expenses all may be associated with an investment in exchange traded products managed by Horizons ETFs Management (Canada) Inc. (the "Horizons Exchange Traded Products"). The Horizons Exchange Traded Products are not guaranteed, their values change frequently and past performance may not be repeated. The prospectus contains important detailed information about the Horizons Exchange Traded Products. Please read the relevant prospectus before investing.

The Horizons Exchange Traded Products consist of the Horizons Index ETFs ("Index ETFs"), 2x Daily Bull and -2x Daily Bear ETFs ("2x Daily ETFs"), Inverse ETFs ("Inverse ETFs"), VIX ETFs (defined below) and active ETFs. The 2x Daily ETFs and certain other Horizons Exchange Traded Products use leveraged investment techniques that can magnify gains and losses and may result in greater volatility of returns. These Horizons Exchange Traded Products are subject to leverage risk and may be subject to aggressive investment risk and price volatility risk, which, where applicable, are described in their respective prospectuses. Each 2x Daily ETF seeks a return, before fees and expenses, that is either 200% or -200% of the performance of a specified underlying index, commodity or benchmark (the "Target") for a single day. Each Index ETF or Inverse ETF seeks a return that is 100% or -100%, respectively, of the performance of a Target. Due to the compounding of daily returns, a 2x Daily ETF's or Inverse ETF's returns over periods other than one day will likely differ in amount and possibly direction from the performance of their respective Target(s) for the same period. The Horizons Exchange Traded Products whose Target is the S&P 500 VIX Short-Term Futures Index™ (the "VIX ETFs"), one of which is a 2x Daily ETF and one of which is an Index ETF, as described in their prospectus, are speculative investment tools that are not conventional investments. The VIX ETFs' Target is highly volatile. As a result, the VIX ETFs are not generally viewed as stand-alone long-term investments. Historically, the VIX ETFs' Target has tended to revert to a historical mean. As a result, the performance of the VIX ETFs' Target is expected to be negative over the longer term and neither the VIX ETFs nor their Target are expected to have positive long term performance. Investors should monitor their holdings, as frequently as daily, to ensure that they remain consistent with their investment strategies.

*The indicated rates of return are the historical annual compounded total returns including changes in per unit value and reinvestment of all dividends or distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns. The rates of return shown in the table are not intended to reflect future values of the ETF or returns on investment in the ETF. Only the returns for periods of one year or greater are annualized returns.