Liquid Alternatives: Optimizing the 60/40 Portfolio Through Varying Market Conditions with Liquid Alts

April 23, 2021 | Liquid Alternatives, News

According to IndexIQ, liquid alternative ETFs are a better way to manage the current market situation.

Salvatore Bruno, Chief Investment Officer and Managing Director, IndexIQ; Kelly Ye, Director of Research, IndexIQ; and Dan Petersen, Director, Product Management, IndexIQ, delved at length on an environment characterized by volatile equity markets and low but rising interest rates. In a webcast titled “Optimizing the 60/40 Portfolio Through Varying Market Conditions with Liquid Alts,” they suggested liquid alternative ETFs as a fast-growing asset class offering the highest degree of liquidity among alternatives. (ETF Trends)

Key points in the webcast

  • Equities are in a record bull market with sky-high valuations
  • Painful corrections cannot therefore be ruled out
  • Meanwhile interest rates are trending higher after bottoming out in 2020
  • In this situation, liquid alts serve as “ballast,” generating returns when the 60-40 portfolio may fail to do so
  • IndexIQ’s classification of Liquid Alts: diversifiers, volatility dampeners, return enhancers
  • Diversifiers: low to medium correlation to equities/attractive risk adjusted returns
  • Volatility dampeners: low to negative correlation to equities/deliver “crisis alpha”
  • Return enhancers: Positively correlated to equities, yet deliver attractive return potential

Liquid alts from IndexIQ

IQ Merger Arbitrage ETF (NYSEARCA: MNA): The higher rates environment is more favorable for Merger Arbitrage strategies. This ETF captures the spread between a stock’s trading price before a deal is announced and its eventual takeover price. These returns are not materially influenced by the equity and bond markets, hence the ETF provides portfolio diversification.

IQ Hedge Multi-Strategy ETF (NYSEARCA: QAI): This ETF tracks the IQ Hedge Multi-Strategy Index which usually experiences less drawdown during large market declines, thereby exhibiting a quality of resilience. This is reflected in the low beta to equity markets demonstrated by multi-strategy liquid alts.

Four IndexIQ ETF strategies are combined to create the multi-alternative approach of QAI, which replicates six common hedge fund investment styles. The four funds include the IQ Hedge Long/Short Tracker ETF (NYSEARCA: QLS), IQ Hedge Macro Tracker ETF (NYSEARCA: MCRO), IQ Hedge Market Neutral Tracker ETF (NYSEARCA: QMN), and IQ Hedge Event-Driven Tracker ETF (NYSEARCA: QED).

Related Story: “Replace The Flawed 60/40 Approach With A Multi-Asset Portfolio” – 7IM

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