iShares Launches Its First Alpha Seeking ETF

November 17, 2009 by  
Filed under Actively Managed ETFs, Commentary, ETF IPOs (New ETFs), ETFs

The iShares Diversified Alternative Trust (ALT), a new multi-asset class multi-strategy ETF was launched yesterday (11/16/2009).  Its stated objective is “to maximize absolute returns from investments with historically low correlation to traditional asset classes, while seeking to control the risks and volatility inherent in futures and forward contracts by taking long and short positions in historically correlated assets.”

The iShares product line has historically focused on providing “beta” exposure to various asset classes and indexes.  By that, we mean its product offerings have tried to match various indexes from both a risk and reward standpoint.

The introduction of ALT is their first foray into “seeking alpha” with an ETF product.  The new ETF will employ multiple strategies against multiple asset classes in an attempt to provide higher returns for a given risk (volatility) level than what simple beta exposure provides.  ALT has a targeted volatility of 6%-8%, as measured by annualized standard deviation.  Additionally, the fund is expected to have a Sharpe ratio of 0.50 to 0.75.

Working backward from the Sharpe ratio and volatility, I calculate the annual “excess” return to be in the range of 3% to 6%.  If you assume a “risk free” rate of 1%, then this translates to a targeted annual total return of 4% to 7% for the new ETF.  As a reference, the standard deviation of the S&P 500 typically ranges between 12% and 24% over moving 3-year periods.

The fund defines its primary approach as “relative value” while employing specific Yield and Futures Curve Arbitrage Strategies, Momentum and Reversal Technical Strategies, and Fundamental Relative Value Strategies.  These strategies will be applied to the four basic asset classes of equities, commodities, currencies, and fixed income.

The fund is actively managed and can change holdings weekly.  It will carry a 0.95% expense ratio.  This is indeed an interesting move from iShares.  To date, actively managed and alternative investment strategies in an ETF format have not caught on with investors.  That is likely to change one day, and iShares wants to be there when that day arrives.

Additional information can be found on the Introduction and FAQ page for ALT.  The overview page doesn’t contain much info at this time, while the holdings reveal a fund that consists entirely of futures and cash at this time.  The prospectus has all the details.

Disclosure compliant with FTC 16 CFR Part 255 covering writer, editor, and publisher: No positions in any of the securities mentioned. No positions in any of the companies or ETF sponsors mentioned.  No income, revenue, or other compensation (either directly or indirectly) received from, or on behalf of, any of the companies or ETF sponsors mentioned.

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