Recently we have heard more about alternatives based exchange traded funds in the media, specifically of strategies that intend to deliver absolute returns with low correlations to traditional asset classes.
In fact, Barron’s ran an article just this past weekend to this effect and highlighted a handful of strategies. Interestingly, this marks a sea change in the ETF industry as there are a number of actively managed or quasi-actively managed products now on the map, and ETFs are not simply vehicles for passive beta exposure.
One such example is iShares Diversified Alternatives (NYSEArca: ALT). Not linked to any specific index benchmark, ALT was designed to provide absolute returns with low correlations to asset classes such as equities, fixed income, and commodities, and has the ability to take on both long and short positions in futures and forward contracts in order to achieve these goals.
Three specific strategies that are employed by the fund are Yield and Futures Curve Arbitrage, Technical Momentum/Reversal, and Fundamental Relative Value. ETFs of this type have appealed to institutions and advisors who have traditionally used hedge fund products in seeking absolute return and/or or low or non-correlated assets, specifically because of two things. There is daily liquidity present, and there are no lock-up periods, nor early withdrawal penalties as exist in some hedge fund or fund of fund structures.