By Lewis Braham

There are some $5.2 trillion invested in hedge funds globally. Yet hedged exchange-traded funds that can profit when markets fall remain a backwater. BlackRock would like to change that.

In December, the world's largest ETF manager launched the iShares Systematic Alternatives Active ETF with the aim of "delivering absolute returns" -- positive results in up or down markets -- like a classic hedge fund. It joins a tiny cluster of nine ETFs that employ various hedge fund strategies in Morningstar's multistrategy category.

BlackRock is the largest manager in the U.S. of such "liquid alternative strategies" via its retail mutual funds. One of its most popular, the $9 billion BlackRock Global Equity Market Neutral, has a strong record, having delivered a 10.8% five-year annualized return with virtually no correlation with U.S. stocks. When the S&P 500 index was down 18% in 2022, it was up 1.6%.

Although not a clone, the new ETF incorporates that mutual fund's strategy and will be run by the same division, BlackRock Systematic, which has managed alternative strategies for 40 years.

Unlike traditional ETF allocation weightings -- say, 60% to stocks and 40% to bonds -- hedge fund managers often speak of their overall target volatility levels and "risk budgets" for different investments. The funds often employ leverage, and a small allocation to a volatile sector or asset class can dramatically affect returns, even as a large leveraged weighting in a stable asset like short-term bonds barely moves the volatility needle. Moreover, betting against stocks or other securities via "short" positions can largely neutralize the volatility of a weighting to a particular sector or asset class.

BlackRock's new ETF targets a 7% to 9% annualized volatility level, which is more than Global Equity Market Neutral's 6% in the past five years, but less than the S&P 500's 15%. In the ETF's risk budget, one-third of that 7% to 9% will be market-neutral, says Jeffrey Rosenberg, the ETF's co-manager. In that bucket, the ETF will also incorporate the market-neutral strategy of another mutual fund, BlackRock Systematic Multi-Strategy, which buys high-quality equities and shorts low-quality ones with debt-laden balance sheets.

The second third of the risk budget will go to a "dynamic macro" strategy. "Instead of operating at the single-name equity level, which is what the market neutral strategies do, we're operating on macro assets," Rosenberg says. "They are interest rates, commodities, FX [i.e., currencies], and equity indexes." So instead of, say, going long Ford Motor and short General Motors, the ETF uses derivatives to go long a European stock index and short the U.S. or long oil and short natural gas, for example.

Although BlackRock has a successful mutual fund, BlackRock Tactical Opportunities, which makes such broad macro bets, that fund has different managers with a different approach toward macro investing. The closest analogue, Rosenberg says, would be the iShares Managed Futures Active ETF, which BlackRock launched last March.

That ETF employs a trend-following strategy to identify which indexes have the most upward or downward price momentum to determine its long or short positions. But the newer ETF will add some fundamental macro screens to its investment criteria, such as inflation, economic growth, and interest rates.

The third risk bucket will be "strategic premia," a fancy term for a long-only "directional" strategy in various asset classes. The weightings will be determined by the relative valuation of the asset classes' expected returns and the macro outlook. So if bonds look more attractive than stocks, the ETF will overweight bonds, and vice versa.

Such a complex strategy may prove difficult to pull off. But if any manager can do it, it's probably BlackRock. The ETF's expense ratio is 0.99% -- high for an ordinary ETF, but low for an alternative fund.

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February 11, 2026 02:00 ET (07:00 GMT)

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