Are Alternative ETFs Good Diversifiers?
Uncorrelated returns are not a panacea
December 2022. Reading Time: 10 Minutes. Author: Nicolas Rabener.
SUMMARY
- Alternative products with uncorrelated returns do not necessarily provide diversification benefits
- Out of 10 alternative ETFs, only one product improved the Sharpe ratio of a 60/40 portfolio
- Correlations should be regarded carefully in fund selection
INTRODUCTION
Given the demise of the traditional 60/40 portfolio comprised of equities and bonds in 2022, investors are desperate for diversifying strategies. There are thousands of unique strategies like private equity, hedge funds, tactical asset allocation, and so on that claim to offer uncorrelated returns and compete for capital.
Theoretically, identifying attractive alternative strategies is easy. Any strategy that offers returns uncorrelated to the stock and bond market should be yielding diversification benefits. In reality, this is not that simple, which we will demonstrate in this article (read Liquid Alternatives: Alternative Enough?).
THE ALTERNATIVE CHAMPIONS
We select 9 ETFs and one mutual fund that are traded in the US, pursue alternative strategies, and have at least a 5-year track record. These are the following:
- IQ Hedge Multi-Strategy Tracker ETF (QAI): $639m AUM – seeks to replicate multi-strategy hedge funds
- IQ Hedge Macro Tracker ETF (MCRO): $3m AUM – seeks to replicate global macro hedge funds
- Hull Tactical US ETF (HTUS): $23m AUM – tactical asset allocation strategy
- BlackRock Strategic Income Opportunities Portfolio (BSIKX): $39,000m AUM – seeks to provide access to alternative credit
- SPDR SSgA Multi-Asset Real Return ETF (RLY): $570m AUM – seeks to generate real returns
- IQ Merger Arbitrage ETF (MNA): $550m AUM – seeks to replicate merger arbitrage hedge funds
- WisdomTree Managed Futures Strategy Fund (WTMF): $130m AUM – seeks to replicate CTAs
- Invesco DB G10 Currency Harvest Fund (DBV): $43m AUM – seeks to provide currency carry
