BlackRock is applying its hedge fund strategy to its exchange-traded fund business.
Jeffrey Rosenberg, a senior portfolio manager on the firm’s systemic fixed income team, plays a leading role in the firm’s Liquidity Alternatives ETF, which employs a long-short strategy in an ETF wrapper.
He argues that this strategy offers valuable diversification amid the recent breakdown in the relationship between stocks and bonds.
“The old adage about bonds is, ‘When stocks go down, bonds go up.’ Well, we just went through a risk-of-war period in March, where once again the exhibit revealed…that’s not the case. And that actually happened in 2022,” Rosenberg said on CNBC’s “ETF Edge” this week. “This whole post-COVID environment poses a real challenge to the fundamental principle of the 60/40 portfolio: fixed income diversification.”
Rosenberg said customer demand for liquid Alts ETFs is increasing due to a desire to diversify their diversification options.
He added: “We are implementing technology developed on the hedge fund side into our business, primarily focused on market-neutral long-short investing.” “This is an important kind of ‘aha’ moment for ETF investors to realize that most of their exposure in the ETF ecosystem is some type of beta exposure.”
Mr. Rosenberg is the portfolio manager for two of BlackRock’s Liquid Alts ETFs: iShares Systematic Alternatives Active ETF (IALT) and iShares Managed Futures Active ETF (ISMF). As of April 8, IALT is up almost 8% so far this year, and ISMF is up nearly 5%, according to the company’s website.
“What liquid alternatives offer is the ability to move away from just the direction of the market and look at other sources of income,” Rosenberg said.
He highlighted the major challenges facing investors on the stock market side.
“Our stock portfolio is increasingly dominated by large-cap stocks, which are big tech winners,” Rosenberg said. “That concentration eliminates diversification and the value of diversification on the equity side. So liquid alternatives can address both of these challenges in portfolio construction.”
“When the market moves zig-zig, something else moves zig-zig.”
VettaFi’s Todd Rosenbluth still sees liquid alts ETFs as an emerging category.
“Overall, this is still relatively small compared to traditional stocks.” [and] Traditional bonds, but when the market zigs, we’re seeing advisors looking for things that zig,” the firm’s head of research said in the same interview.
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