BlackRock: 'High Alpha' Investment Popularity Pays Off

BlackRock’s (BLK) Q4 earnings announcement last Thursday showed why alternative investments are so popular amongst asset managers (see Bloomberg piece, “BlackRock Earnings Beat Estimates on Hedge-Fund Fees“).

As McKinsey and others have predicted, asset management will become bifurcated between “cheap beta” and “high alpha” products. In the case of BlackRock, however, this can be taken a step further. It appears that the firm’s new subscriptions last year were dominated by “high alpha” and plain old cash.

BlackRock’s press release alludes to this trend:

The industry-wide influx in money market funds continued to dominate net flows, contributing $22.2 billion or 72% of the total for the quarter. In contrast, fixed income suffered net outflows of $4.4 billion and transfers of $1.6 billion, as clients repositioned their portfolios and sought opportunistic strategies with which to exploit market dislocations. We capitalized on continued interest in alternatives, raising $4.5 billion in capital commitments for distressed credit and mortgage funds (a portion of which has been drawn and is counted in AUM), adding $1.4 billion in fund of funds, $1.2 billion in real estate, and $1.1 billion in other alternative products. We also had a record new business quarter in equity and balanced products, with net new business of $10.8 billion, led by $5.5 billion of net inflows in balanced and asset allocation funds, $3.7 billion in sector funds, particularly natural resources, and $991 million in U.S. equity strategies.

Page 13 of BlackRock’s 8-K tells the tale. Net subscriptions of “alternative investment products” (see their US line-up of funds here) were $11.7 billion - or 24.3% of the firm’s alternative funds AUM at the beginning of the year. The only asset class to beat this growth, as the press release suggests, was “cash management” (subscriptions of $75.3 billion or 31.9% of its starting balance on Jan. 1).

Meanwhile, over in traditional-investment-land, “equity and balanced” was up $23.5 billion, or only 6% and fixed income had net new subscriptions of $27.2 billion or just 6.1%. Not only were these growth numbers puny compared to alternatives and cash, but even their absolute amounts were smaller.

BlackRock’s reported “record new business quarter in equity and balanced products” suggests there still may be some life left in traditional assets. But at $10.8 billion, these quarterly subscriptions are still only 2.4% of the Q3 quarter-end AUM in this asset class. In other words, if they broke the record every quarter for a year, “equity and balanced” would come up well short of “alternatives investment products” on a percentage growth basis.

In related news. A giant vise was reportedly seen being lowered onto BlackRock’s equity and fixed income departments. And as it was tightened, out popped BlackRock co-founder Keith Anderson. Anderson has since become a “squeez-or“, instead of a “squeez-ee“. He jumped ship last week to join a company specializing solely in “high alpha” products - Soros Fund Management.