Asset Classes, Explained

Private equity buys ownership stakes in established companies outside public markets — often whole companies — aiming to improve, grow or restructure them and sell years later. Venture capital is its early-stage sibling: minority stakes in young companies, where most bets fail and a few large wins are meant to carry the portfolio.

The dominant structure is the limited partnership: investors (LPs) commit capital that the manager (GP) “calls” over several years as deals are found, then returns as investments are exited. A typical fund runs ten years or more. Fees classically follow “2 and 20” — a management fee on committed capital plus carried interest, the manager's ~20% share of profits above a hurdle.

What has to go right: the manager must find deals, buy them well (often using leverage inside the companies), genuinely improve them, and exit into a willing market. Each step is a skill; all four compound.

What tends to go wrong: exits take longer than projected, leaving capital locked well past year ten; interim valuations prove optimistic when reality arrives; leverage magnifies problems in downturns; and dispersion between managers is enormous — the average outcome and your outcome can differ wildly.

Private credit funds lend money — to businesses banks won't serve or serve slowly, against real estate, equipment, or receivables — and pass the interest through to investors. In Canada the most common retail-facing form is the mortgage investment corporation (MIC): a pool that lends against property, usually where banks declined, and distributes the interest.

The structural appeal is easy to see: contractual interest payments feel steadier than market prices. The structural catch is just as fundamental: the yield is the price of the risk. Borrowers paying well above bank rates are, by definition, borrowers banks wouldn't take at bank rates.

Questions that reveal a lending pool's true character: What loan-to-value ratios? First mortgages or seconds? What share of borrowers are currently behind? How much lending is to parties related to the manager? Is the portfolio concentrated in one region's property market? Does the fund itself borrow to amplify the pool?

What tends to go wrong: defaults arrive in clusters when property markets or the economy turn; recovering money through foreclosure is slow and costly; redemptions get suspended precisely when investors most want out — a steady 8% for years can coexist with a structure that gates or breaks in a bad eighteen months.

Beyond REITs on the stock exchange, real estate reaches investors privately in two main shapes: funds that hold portfolios of income properties, and syndications — single-project deals, often development, where investors finance one building's journey from land to sale.

The economic engine differs sharply between the two. Income funds collect rent, pay expenses and distribute the remainder — sensitivity: occupancy, rates, and financing costs. Developments earn nothing until completion — sensitivity: construction costs, timelines, approvals, and the market price of the finished product years from now. Development is the far riskier shape, however solid the renderings look.

Structure matters as much as strategy: how much leverage sits on the properties (higher debt magnifies both directions), whether distributions are earned or partly paid from investors' own capital (“return of capital” — ask directly), and how the assets are valued and by whom.

What tends to go wrong: interest-rate rises hit leveraged property from both sides (financing costs up, valuations down); developments overrun and re-raise capital, diluting early investors; redemption promises collide with the fact that buildings can't be sold by Friday.

Hedge fund is a wrapper, not a strategy: privately offered funds with wide freedom to short, use leverage and derivatives, and concentrate. Underneath sit distinct approaches — long/short equity, global macro, market-neutral arbitrage, managed futures — each with different behaviour and failure modes. Evaluating “a hedge fund” means first learning which of these it actually runs.

Since 2019 a public cousin exists: liquid alternatives — mutual funds and ETFs permitted limited hedge-fund techniques with daily liquidity and prospectus disclosure. Same toolbox, much smaller doses, exchange-listed convenience. The private versions offer fuller expression of the strategy in exchange for lockups and opacity.

Fees deserve special attention here: management plus performance fees, often with a high-water mark (no performance fee until past losses are recovered). Understand how the performance fee is calculated and whether the hurdle is zero, cash, or an index — the difference changes what you're actually paying for.

What tends to go wrong: leverage converts small mispricings into large losses when markets gap; “market-neutral” correlations fail in exactly the crises they were sold to hedge against; strategy complexity means investors often cannot detect drift until results reveal it.

Infrastructure investing funds long-lived essential assets — power generation, transport, utilities, telecom — usually through decade-plus private funds. The draw is contracted, often inflation-linked cash flows; the constraints are extreme illiquidity, regulatory/political exposure, and substantial leverage inside the assets. Retail access is largely indirect, since the funds themselves are institutional.

Commodities — energy, metals, agriculture — reach investors mainly through futures: exchange-traded contracts on future delivery. Futures are professionally intermediated in Canada by their own registration families (commodity trading managers and advisers, futures commission merchants — all visible in the directory), and they are leveraged instruments by construction: small price moves produce outsized gains and losses, and losses can exceed the money you put up.

Managed futures programs hand that toolkit to a professional who trades systematically across markets. Results historically move independently of stock markets — which cuts both ways: diversification in some crises, long stretches of losses while everything else rises in others.

What tends to go wrong: leverage forces exits at the worst moments (margin calls); roll costs quietly erode returns in some markets; political and regulatory shifts reprice infrastructure assets that can't be sold in response.

Crypto assets are digital tokens recorded on blockchains — shared ledgers maintained by networks rather than institutions. Bitcoin functions mainly as a scarce bearer asset; platforms like Ethereum add programmable contracts; thousands of smaller tokens attach to specific projects; stablecoins aim to track currencies and are only as good as their reserves and redemption rights.

Canadian access routes differ enormously in their protections: registered trading platforms (restricted dealers with custody and conduct conditions — see Registration & the Rules), exchange-listed crypto ETFs inside ordinary brokerage accounts, and offshore platforms and self-custody, where Canadian rules and recourse essentially do not reach. The same coin carries very different intermediary risk depending on the route.

Stated plainly: these assets produce no cash flows, so valuation rests on adoption, scarcity and belief; drawdowns of 70–90% have occurred repeatedly across cycles; fraud and platform failure have destroyed more investor money than market moves have; and self-custody means a lost key is a total, unrecoverable loss.

None of that is a prediction in either direction — it is the observed texture of the asset class that any allocation decision should start from.