BlackRock applies hedge fund strategies to its exchange-traded fund business.
Jeffrey Rosenberg, the firm’s senior portfolio manager on the systematic fixed income team, plays a leading role in the firm’s liquid alternative ETFs, which use a long-short strategy in ETF shells.
He believes the strategy provides valuable diversification given the recent collapse in the stock-to-bond ratio.
“The great old saying around fixed income is, ‘My bonds go up when my stocks go down.’ Now, in March, we just went through a period with the threat of war in which we clearly saw that… that doesn’t apply. And I really saw it in 2022,” Rosenberg told CNBC’s “ETF Edge” this week. “This whole post-Covid environment has really called into question the basic principle of the 60-40 portfolio that bonds diversify.”
According to Rosenberg, client demand for liquid alts ETFs is growing because of a desire to diversify their assets.
“We are bringing the techniques we have developed into the hedge fund side of our business, which focuses primarily on market-neutral long-short investing,” he added. “This is the key ‘a-ha moment’ for ETF investors when they realize that the majority of their exposure to the ETF ecosystem is some kind of beta exposure.”
Rosenberg is a portfolio manager for two of BlackRock’s Liquid Alts ETFs: the iShares Systematic Alternatives Active ETF (IALT) and the iShares Managed Futures Active ETF (ISMF). As of April 8, the company’s website shows that IALT is up nearly 8% so far this year, while ISMF is up nearly 5%.
“What liquid alternatives bring is the ability to look for other sources of return beyond just market direction,” Rosenberg said.
He pointed to a major challenge for investors on the stock market side.
“Our stock portfolios have become increasingly dominated by the big, big tech winners,” said Rosenberg. “With that concentration comes a loss of diversification and a loss of diversification value on the equity side.” Liquid alternatives can therefore address both portfolio construction challenges.”
“Something that zigzags when the market zigzags”
Todd Rosenbluth of VettaFi still sees liquid alts ETFs as an emerging category.
“Overall, this is still relatively low compared to traditional equity capital.” [and] “We see advisors looking for something that moves when the market is zigzagging,” the firm’s head of research said in the same interview.
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