AdvisorShares Files For The Active Bear ETF (HDGE)

AdvisorShares has filed paperwork with the SEC for “The Active Bear ETF” (HDGE). The Active Bear ETF (the “Fund”) seeks capital appreciation through short sales of domestically traded equity securities. As of the July 9th filing date there are no fund operating expenses noted.

PRINCIPAL INVESTMENT STRATEGIES

The Sub-Advisor seeks to achieve the Fund’s investment objective by selecting a portfolio, on a short basis only, of liquid U.S. exchange-traded equities, exchange-traded funds (ETFs) and exchange-traded products. The Sub-Advisor implements a bottom-up, fundamental, research driven security selection process that seeks to identify securities with low earnings quality or aggressive accounting that may be intended, on the part of company management, to mask operational deterioration and bolster the reported earnings per share over a short time period. In addition to these issues, the Sub-Advisor seeks to identify earnings driven events that may act as a catalyst to the price decline of a security, such as downwards earnings revisions or reduced forward guidance. On a day-to-day basis the Fund may hold U.S. Government securities, short term high quality fixed income securities, money market instruments, overnight and fixed-term repurchase agreements, cash and cash equivalents with maturities of one year or less for collateral purposes.

In addition to extensive quantitative analysis, careful consideration is given to qualitative analysis. The assessment of the management team, accounting practices, corporate governance and the company’s competitive advantage are all key items. Once these quantitative and qualitative characteristics are thoroughly analyzed, the Sub-Advisor then determines if there is sufficient return to the stock price to warrant an investment. Once a position is included in the Fund’s portfolio, it is subject to regular fundamental and technical risk management review. This continual review process seeks to identify problem positions early and enhances performance by removing them before they become significant issues for the portfolio.

MORE INFORMATION ABOUT PRINCIPAL INVESTMENT STRATEGIES

The Fund is an actively managed ETF and thus, does not seek to replicate the performance of a specific index, but rather uses an active investment strategy to meet its investment objective. Accordingly, the Sub-Advisor, subject to the oversight of the Advisor and the Board, has discretion on a daily basis to actively manage the Fund’s portfolio in accordance with the Fund’s investment objective.

Investment Philosophy

With respect to the Fund, the Sub-Advisor seeks to identify securities with low earnings quality or aggressive accounting. These factors are often intended to mask operational deterioration and bolster reported earnings in the short term. Active managers possessing the ability to identify and quantify aggressive accounting can achieve superior returns by uncovering companies with deteriorating fundamentals.

Investment Process

The Sub-Advisor utilizes a disciplined, consistent investment approach to both security selection and risk management. The Sub-Advisor implements a bottom-up, fundamental, research driven security selection process. In selecting short positions, the Sub-Advisor seeks to identify securities with low earnings quality or aggressive accounting which may be intended on the part of company management to mask operational deterioration and bolster the reported earnings per share in the short-term.

In addition to extensive quantitative analysis, careful consideration is given to qualitative analysis. The assessment of the management team, accounting practices, corporate governance and the company’s competitive advantage are all key items. Once these quantitative and qualitative characteristics are thoroughly analyzed, the Sub-Advisor then determines if there is sufficient return to the stock price to warrant an investment.

Once a position is included in the Fund’s portfolio, it is subject to regular fundamental and technical risk management review. This continual review process seeks to identify problem positions early and enhances performance by removing them before they become significant issues for the portfolio.

Security Selection

In selecting short positions, the Sub-Advisor seeks to identify securities with market capitalizations typically of $1 billion and above, and with low earnings quality or aggressive accounting. The Sub-Advisor believes these factors are often intended on the part of company management to mask operational deterioration and bolster the reported earnings per share in the short-term. Key factors include, but are not limited to:
· quality and sustainability of revenue, as indicated by extended payment terms, changes in revenue policies or other factors;

  • deterioration of cash flows or declining quality of earnings;
  • reserve reversals or an increase in “soft” assets which could indicate the capitalization of expenses; and
  • an analysis of irregular items affecting operating or gross margins including inventory, payables and taxes.

The Sub-Advisor will also seek out the following qualitative factors:

  • poor corporate governance or significant related party transactions;
  • heavy insider selling; and
  • unique competitive challenges that might make for a more compelling short position.

Once a company that fits the portfolio’s preferred criteria is identified, a detailed research analysis is conducted on the stock to further evaluate its potential. The majority of research is generated internally. In evaluating short candidates, the Sub-Advisor seeks to quantify the impact of red flags on reported earnings in order to determine the magnitude of the differences between the reported earnings per share and an estimate of the sustainability of earnings adjusted for potentially aggressive accounting.

Portfolio Construction

Once it is determined that a company possesses the proper characteristics, it must then be determined whether to include that position in the Fund’s portfolio. During this analysis, the Sub-Advisor considers the following factors when constructing the optimal portfolio:

  • Opportunity Set – Stocks are assessed on individual merits and relative to both existing holdings and other stocks competing for inclusion.
  • Valuation/Catalyst – Valuation metrics are used to a lesser extent in assessing short positions. But, qualifying the impact of red flags on the reported earnings to determine the magnitude of the differences between the reported earnings per share and an estimate of the sustainability of earnings is very important.
  • Technical Factors – Technical factors are considered in conjunction with fundamental factors to determine the appropriate initial weighting at the entry point into the portfolio. Technical analysis is important to a short portfolio, as the Sub-Advisor generally avoids initiating short positions in stocks making all-time price highs, 52-week highs in price, or in strong upward trends which may capture the attention of short-term and momentum traders. In general, the Sub-Advisor seeks to identify stocks with prices beginning to under-perform the market, show distribution or stall its price ascent prior to inclusion into the Fund’s portfolio.

The Fund generally targets composition of 20 to 50 equity short positions; with an average individual position size which generally range between two percent (2%) and seven percent (7%) of the aggregate portfolio exposure. Typically, short positions will be initiated at the lower end of the position size range in order to gain exposure to a particular stock. As the concerns for a given company are deemed especially timely or the conviction level increases, the position size may be increased to capitalize on an expected earnings shortfall or change in investor expectations. This tactical approach, combined with exposure to lower short interest stocks, generally allows the Sub-Advisor to better mitigate risk while attempting to capture profits based on the conviction level of individual stocks in the portfolio.

ETFs or other exchange-traded products will also be utilized to manage exposure to broad indexes or certain sectors. Exchange traded products positions will typically range between ten percent (10%) and fifteen percent (15%) of the Fund’s portfolio. Exchange-traded products may be used to gain exposure in instances when the Sub-Advisor has a more bearish posture with respect to the broad market. In contrast to ETFs, exchange-traded products are not registered pursuant to the Investment Company Act of 1940.

For the full prospectus click: HERE

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