BlackRock rips page from hedge fund playbook, applies it to ETFs

BlackRock is applying hedge fund strategies to its exchange-traded fund business.

Jeffrey Rosenberg, the firm’s senior portfolio manager on the systematic fixed income team, has a leading role in the firm’s liquid alternatives ETFs — which use a long-short strategy in ETF wrappers.

He contends the strategy provides valuable diversification amid the recent breakdown in the relationship between stocks and bonds.

“The great old adage around fixed income is ‘my bonds go up when my stocks go down.’ Now, we just went through a period in March with war risk where we clearly saw again on display… that doesn’t hold. And, really saw it in 2022,” Rosenberg told CNBC’s “ETF Edge” this week. “This entire post-Covid environment has really challenged that bedrock principle of the 60-40 portfolio that bonds are diversifying.”

According to Rosenberg, client demand for liquid alts ETFs is growing because there’s a desire to diversify your diversifiers.

“We’re bringing the techniques that we’ve developed in the hedge fund side of our business, which primarily center around market neutral, long-short investing,” he added. “That’s the key kind of ‘a-ha moment’ for ETF investors to realize most of what they have exposure to in the ETF ecosystem is some kind of beta exposure.”

Rosenberg is a portfolio manager on two BlackRock liquid alts ETFs: the iShares Systematic Alternatives Active ETF (IALT) and the iShares Managed Futures Active ETF (ISMF). As of April 8, the firm’s website shows IALT is up almost 8% so far this year while the ISMF is up nearly 5%.

“What liquid alternatives bring to the table is the ability to look at other sources of return away from just market directionality,” said Rosenberg.

He highlighted a major challenge investors face on the stock market side.

“Our equity portfolios have been more and more dominated by the big, large cap tech winners,” said Rosenberg. “With that concentration is a loss of diversification and a loss of diversification value on the equity side. So, liquid alternatives can address both of these challenges to portfolio construction.”

VettaFi’s Todd Rosenbluth still regards liquid alts ETFs as an emerging category.

“Overall, this is still relatively small compared to traditional equity [and] traditional fixed income, but we are seeing advisors looking for something that’s going to zag when the market zigs,” the firm’s head of research said in the same interview.