AdvisorShares, the Maryland-based issuer behind many of the most popular active ETFs on the market, is expanding its product lineup. Today marks the debut of the Active Bear ETF (HDGE), a fund that seeks capital appreciation through short sales of U.S. stocks. The fund is sub-advised by Ranger Alternative Management, and the management team will employ a bottom-up, fundamental, research-driven security selection process.
Forensic accounting will be at the heart of the new ETF. In identifying securities to short, the fund managers will seek out those with low earnings quality or aggressive accounting that may be intended to mask operational deterioration and boost reported earnings in the short term. The managers will also seek to identify earnings-driven events that may trigger a price decline, such as downward earnings revisions or reduced forward guidance. According to the fund’s investment objective and methodology, potential warning signs are ranked in proportion to where they are located on the income statement–the higher up, the greater the cause for concern. Among the elements of reported financials that may be analyzed are revenue recognition policies, changes in inventory and reserves, and charges for restructuring and other non-recurring events.
In addition to utilizing accounting metrics to examine and scrutinize the income statement, cash flow statement, and balance sheet, the fund managers also rely on qualitative factors. Those can include analysis of the executive team, corporate governance, and the company’s competitive advantages. Technical analysis will also be used in determining HDGE components; Ranger generally avoids initiating short positions in stocks making all-time price highs, 52-week highs in price, or in strong upward trends that may capture the attention of short-term and momentum traders.
At launch, HDGE’s biggest short bets were Juniper Networks (-4.5%), Avon Products (-4.0%), Kohl’s Corporation (-4.0%) and Bank of America (-4.0%) [use the ETF Stock Exposure Tool].
The prospectus for the new fund notes that ETFs may be used, and will generally account for between 10% and 15% of the portfolio. Specifically, ETFs will be used when the manager has a bearish outlook on the broad market. The prospectus also includes some information on the historical performance of a Ranger Short Only Portfolio previously overseen by one of HDGE’s managers. Not surprisingly, the performance has a strong inverse correlation to the broad equity market. The strategy has performed exceptionally well during bear markets, with the gains turned in during 2008 being particularly impressive:
|Ranger Short Only Portfolio||12.55%||94.85%||-28.99%||5.83%|
|*Partial year started 10/1/07|
|**Partial year ended 3/31/10|
HDGE may have appeal to investors looking to hedge equity exposure, and the new fund could also be coupled with long positions for those looking to implement a long/short strategy. “Investors have told us that they are searching for a true hedging solution, with an experienced short manager,” said Noah Hamman, CEO and Founder of AdvisorShares. “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 generally maintain between 20 and 50 short positions with between 2% and 7% exposure to any one name. HDGE is the first actively managed ETF in the Inverse Equities ETFdb Category.
The fund will charge an expense ratio of 1.85%, making it the most expensive U.S.-listed ETF [see most expensive ETFs].
AdvisorShares’ Growth Continues
HDGE is the sixth active ETF in the AdvisorShares lineup, which now boasts aggregate assets of about $150 million. The Cambria Global Tactical ETF (GTAA) has been especially popular with investors, while the relatively new Peritus High Yield ETF (HYLD) has shown some impressive results relative to other members of the Junk Bonds ETFdb Category.
Disclosure: No positions at time of writing.