Invesco PowerShares, the Illinois-based fourth-largest US provider of exchange-traded funds, has launched a multi-strategy, alternative portfolio in partnership with Morgan Stanley that focuses on enhanced risk-adjusted returns while lowering volatility.
The PowerShares Multi-Strategy Alternative Portfolio (LALT) is likely to find favor with traditional stock/bond investors who wish to better manage volatility as interest rates begin to normalize in the US. The liquid alternatives and the multi-alternative segments are fairly crowded with 125 funds currently on offer (per Morningstar) although there are only four ETFs in the category. Invesco Advisors will sub-advise LALT.
The new fund tracks the Morgan Stanley Multi-Strategy Alternative Index, a proprietary benchmark that combines multiple rules-based, quantitative strategies and has a low correlation to traditional asset classes. However, since LALT is an actively managed fund, it doesn’t aim to fully replicate the index; instead it looks to generate returns in excess of the returns from the index by investing in a combination of equities, financial futures, currency forwards and other securities.
The proprietary strategies followed by Morgan Stanley index include Volatility Risk Premium Strategies, Quantitative/Stylistic Strategies and Carry Strategies. The Volatility Risk Premium Strategy aims to take advantage of the difference between implied and realized volatilities observed in currency and equity option markets. The volatility risk premium can be considered as compensation to option sellers for taking on risks bigger potential losses during periods of high realized volatility.
A Quantitative or Stylistic Strategy uses relative valuation methods to identify undervalued stocks and currencies and may take long/short positions to generate market-neutral returns.
In a Carry Strategy, fund managers try to capture the term premium and forward rate bias often observed in equity, currency and interest rate markets in highly volatile markets.
All the three strategies have historically exhibited low correlation with one another and the broader securities markets. Each of the individual strategies have been used by institutional investors and hedge funds for years to capture nontraditional risk premia across equity, interest rate, volatility and currency markets and combining them together could result in further diversification and risk return.
The fund has a net annual expense ratio of 0.96 percent.
Disclosure: No holdings