BlackRock launches first retail alternative funds

Given the recent dramatic swings in the market, financial advisers are increasingly looking for investment products that do not correlate to the markets, Frank Porcelli, head of BlackRock’s U.S. retail business, told the Reuters Global Wealth Management Summit on Wednesday.”There’s never been a more difficult time to navigate financial markets than where we are today,” Porcelli said.As a result, many broker-dealers are trying to increase their clients’ use of alternative investments, which are not correlated to the markets. But they are having trouble doing so, he said.For example, one national broker-dealer with $1.7 trillion in assets recently came to BlackRock asking the firm to help increase clients’ allocation to alternatives. While the firm wanted to see on average a 10 percent allocation to alternatives, the actual client holding of alternatives was less than 1 percent, Porcelli said.The problem was that this firm, like many, offered hedge-like funds only to very high-net-worth investors. That is why BlackRock is launching alternative mutual funds for retail investors with just $1,000 to invest.This week, BlackRock unveils a long/short emerging markets fund, a commodities strategies fund and a long/short credit opportunities fund.In starting the funds, the New York-based asset manager enters a somewhat crowded market. Almost half of the 247 alternative mutual funds on the market today have been launched in the last three years, according to Morningstar Inc.But if BlackRock can show strong performance, there is definitely growing demand for these products, said Jeff Tjornehoj, senior research analyst at Lipper.”If you are 100 percent long or 100 percent short, you are likely to end up nowhere,” Tjornehoj said. “But with a clever manager and the right strategy, you can edge some gains from this seesaw market.”Specifically, there is growing demand in long-short debt funds, said Mallory Horejs, an alternatives analyst at Morningstar Inc. “Our data shows that investors are over-allocated to fixed income right now, so funds that hedge credit and/or interest rate risk hold widespread appeal.”As of September 30, investors had poured $4.89 billion so far this year into the 13 long/short debt funds that Morningstar has in its database. As a response to investor interest in these funds, Morningstar is going to give long/short debt funds their own category this fall, Horejs said.BlackRock believes it has the expertise to make its push into retail alternatives successful, particularly because it already has a $100 billion alternatives business, Porcelli said.The firm also has hired a team of seven alternative specialists to act as experts for its wholesalers.He believes that investor interest in alternatives is not a passing fad.”I think the traditional allocation of 60 percent stocks, 40 percent fixed income is a thing of the past,” he said. “We have been working on ‘the new diversification.‘“BlackRock’s push into retail alternative funds is part of its effort to double its U.S. mutual fund business aimed at retail investors to $600 billion by the end of 2014.Since BlackRock bought Merrill Lynch Investment Managers in 2006, it has focused on getting more of its retail funds sold through the platforms of third-party broker-dealers other than Merrill Lynch, Porcelli said. The firm’s mutual fund penetration at broker-dealers other than Merrill has jumped to 5 percent from less than 1 percent in 2006. “We are in the top three or four (fund groups) at every firm we do business with,” Porcelli said.