The very first short-only actively-managed ETF is being launched by AdvisorShares today, January 27th, and it is called the Active Bear ETF (NYSE:HDGE). HDGE will be the sub-advised by Ranger Alternative Management, a Dallas-based investment manager that will implement a short-only, large-cap domestic equity investment strategy by utilizing a bottom-up, fundamental, research driven security selection process.
This Active ETF is the first of its kind given its strategy of developing a short-only portfolio and serving as a potential hedge to many long-only investor portfolios. HDGE debuts at an interesting time as the markets have been going straight up on a ramp for the last few months and actually showed some signs of a pending correction through a mini, sharp pullback lasting a couple of days. Market corrections are really where HDGE will be able to strut its stuff, more so than in any positive trending market.
In selecting short securities, portfolio managers John Del Vecchio and Brad Lamensdorf try to identify companies 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 over a short time period. In addition, the portfolio management team 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. Lastly, HDGE employs a variety of technical factors that drive short Beta exposure with the goal of generating alpha in any market environment. The portfolio managers will also seek out companies with poor corporate governance, heavy insider selling and strong competitive challenges. The fund will hold anywhere from 20 to 50 short positions. As with all actively-managed ETFs in the US, daily portfolio holdings will be disclosed on the fund website every day, with a 1-day lag.
In press release from AdvisorShares, Noah Hamman, CEO of AdvisorShares, commented that, “Investors have told us that they are searching for a true hedging solution, with an experienced short manager. The current products either blindly short every security, or use exposure to commodities as a synthetic hedge which we know often does not work. Ranger has considerable experience using their proprietary forensic accounting approach to identify domestic equity stocks that are expected to underperform”.
The Active Bear ETF will be AdvisorShares’ sixth actively-managed ETF on the market, with some of its recent launches tasting quite a lot of success. As for expenses though, HDGE comes in right on top of what is already a very expensive line-up of funds, with a net expense ratio of 1.85%. And this is after a fee waiver in place, as the gross expenses of the fund are 1.88%. The fee includes a management fee of 1.00% that goes to Ranger Alternative Management.
Track Record/Past Performance
The fund prospectus provides some insight into the prior track record of the strategy being implemented for HDGE, which has been used within segregated accounts previously. The performance of a “Ranger Short Only Portfolio” since October 2007 sheds some light on how investors can expect HDGE to perform. Over calendar year 2008, where the S&P500 Index returned -37%, the Ranger Short Only Portfolio returned 94.85%, clearly showing its utility as a portfolio hedge. However, in 2009, when markets bounced back sharply with the S&P500 returning 26.46%, the short only portfolio expectedly got smoked – with a return of -28.99%.
So in some ways, in return for “insurance” protection against large down drafts, investors should be ready to pay up the “premium” during strong up-trends in the markets.
Written By Shishir Nigam from ActiveETFs | InFocus Disclosure: No positions in above-mentioned names.
Shishir Nigam is the founder of ActiveETFs | InFocus (http://www.etfshub.com/), which provides extensive coverage and analysis of actively-managed ETFs in US and Canada, including debates on major industry trends, insights on the latest product launches from issuers in the Active ETF space as well as in-depth interviews with industry executives and thought leaders.
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