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iShares Launches Actively-Managed “Alternatives” Product

by Michael Johnston on November 16, 2009 | ETFs Mentioned: ALT • MCRO • QAI

San Francisco-based iShares, the market leader with more than 185 U.S. listed ETFs, announced on Monday the launch of its latest product, the iShares Diversified Alternatives Trust. Unlike most iShares products that seek to track the performance of an underlying benchmark, the Diversified Alternatives Trust seeks to maximize absolute returns from investments with historically low correlations to traditional asset classes. The new product will trade on the NYSE Arca Exchange under the ticker ALT and charge an expense ratio of 0.95%.

Currency Futures Are One Option for the New ALT The construction of ALT will be somewhat fluid, based on a process that ranks each potential strategy by expected return, volatility, and trading cost. Potential strategies include:

Yield and Futures Curve Arbitrage: Simultaneously entering into long and short positions in various bond, interest rate, commodities, and currencies futures contracts believed to be mispriced relative to each other.
Technical Momentum / Reversal: Using comparisons of the recent returns and historical returns of assets to identify both long “momentum” and short “reversal” trading opportunities.
Fundamental Relative Value: Identifying discrepancies between the market and fundamental value of assets through various analytical methods.

ALT will target an allocation of annualized portfolio return volatility of 6% to 8%, spread across these three strategies. The trust expects to have a Sharpe ratio of 0.50 to 0.75.

Expanding Industry

ALT is the first actively-managed exchange-traded product launched by iShares, and also one of the first managed futures products available to all levels of investors. Alternative investments have been available to investors for several years, but have generally been expensive, illiquid, and less than transparent. ALT seeks to solve this dilemma by joining managed futures investing with the exchange-traded structure.

There are now several exchange-traded products that offer exposure to strategies previously unavailable to most investors, including several ETFs from IndexIQ. The IQ Hedge Multi-Strategy Tracker ETF (QAI) seeks to replicate the risk-adjusted return characteristics of hedge funds using various investment styles, while MCRO attempts to deliver returns generated by hedge funds pursuing a macro strategy.

Similar to ALT, the Dent Tactical ETF (DENT) from AdvisorShares is also actively-managed, seeking to generate long-term capital growth through proprietary and economic and demographic analyses (take a look under the hood of DENT here).

Disclosure: No positions at time of writing.