Page 224 - A Canuck's Guide to Financial Literacy 2020

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Alternative Investments

Alternative investments are categorized as financial instruments that do not fall in the
traditional category stocks, bonds or mutual funds. Alternative investments could include
hedge funds, commodities, real property, tangible assets, private equity, and venture capital
to name a few. Investors seeking to diversify from traditional funds tend to add alternative
investments into their portfolios.

Accredited Investors

Often referred as “exempt securities”, alternative investments are not publicly traded and
nor easily accessible in a similar fashion to stocks, bonds or GICs. These investments are
often limited to institutional firms and high net worth accredited investors.

An accredited investor is an individual, entity or institution that meets certain income,
financial or net assets criteria. In Canada, the exact definition of an accredited investor can
be found in section 1.1 of the National Instrument 45-106. There are over 20 situations in
where a person might qualify as an accredited investor.

These types of investors are allowed to invest in alternative investments that may not be
available to an ordinary investor. The most common criteria used are mentioned below.

Income Criteria
▪ Your income before taxes has been at least $200,000 or greater in the last two
years and you expect to earn the same level of income this year; OR
▪ You and your spouse have earned at least $300,000 or greater before taxes in
the last two years and you expect to maintain the same level of income this
year.

Financial Assets
▪ You and your spouse have financial assets worth at least $1 million before
taxes, net of related liabilities
▪ Cash and cash equivalents would be considered liquid or financial assets.
Net Assets
▪ You and your spouse have net assets of at least $5,000,000
▪ Fixed and liquid assets would be included to meet this exception.
Other Criteria
▪ For a list of other criteria, please refer to the National Instrument 45-106.

Types of Alternative Investments

Qualified investors are eligible to purchase alternative investment products in order to add
extra diversification into their portfolios. They include a range of debt and equity instruments
such as bonds, mortgages, real estate partnerships, income funds, labor sponsored funds,
oil and gas flow-through shares and hedge funds. Below, we’ll list the most common type of
securities that you might run into in the exempt market.