HTUS: An Alternatives Gem for Equity Diversification

We buy what we know and invest in what we understand. When it comes to alternatives, there are no shortcuts to due diligence. That said, alternatives ETFs are often seen as paths to diversification. Each fund delivers on that value proposition in a unique way, but they are collectively great diversifiers. 

Consider that many of us are sitting on heavily concentrated portfolios, while macroeconomic, valuation and geopolitical risks abound. If nothing else, think about the heartburn we already experienced this year. One single company, DeepSeek, challenged one of our favorite narratives tied to some of our biggest portfolio bets. We collectively gasped, worried because we have bet big on a few names and priced our winners to perfection. We’ve left little room for surprises. 

Diversification is good practice, and it helps with long-term results. So, let’s take on that due diligence task and dive into these value-delivering alternative tools.

Let’s take one fund as an example of how these strategies work. The Hull Tactical ETF (HTUS B-) is a hedge-fund-like, or better yet, long/short portfolio that adjusts its exposure on a daily basis by predicting where the S&P 500 is going next.

On the surface, HTUS is a fund capturing the S&P 500. But HTUS is a quantitative strategy. It relies on models inputting between 30 and 40 different signals daily to output a “market sentiment meter” score. That score determines its exposure or positioning in that universe of large-cap stocks. At any time, HTUS can go anywhere from 100% short the S&P 500 to 200% long the index. Right now, the fund’s “market sentiment meter” score is sitting around 80, which translates into “mildly bullish” on the market, as measured by the S&P 500. 

It’s interesting to see that if we were to draw a trendline on HTUS’ allocation overtime, the fund has been slowly trimming its long position in the S&P 500 in recent months. We could argue that the strategy itself has been suggesting that it’s a good time to proceed with some caution. Read: diversify.  

Here’s what to know about this fund, which is nearing its 10-year anniversary this summer: 

HTUS is a quantitative strategy in an ETF wrapper. The allocation decision is a “direct output” from a number of quantitative models powering up this ETF, according to Petra Bakosova, CEO of Hull Tactical. 

These models collect and combine publicly available information of four different kinds: macroeconomic data, fundamental data, sentiment data, and what the firm calls “anomalies,” or seasonal and momentum-type of signals that are difficult to explain, but that are clearly present in the market. Examples of the inputs include interest rates, inflation, the bulk dry shipping index, and so on. 

“We fit all of these pieces of information into a number of models, which aim to predict next day’s S&P 500 return,” Bakosova said. “We start with 30-40 indicators, run regularized regressions to sift through them and drop the ones that haven’t really been helpful, and at the end of the day before the market close, we estimate where the market will be the next day.” 

She continued, “We decide everyday if we want to be invested in the market or collecting a return on cash."

The fund has a wide range to play with, as it can go anywhere from 100% short to 200% long equities, and hold cash-like defensive positions like T-Bills when the models demand it. These allocations are disclosed daily and published on the firm’s website, so investors can know all at times how bullish or bearish the strategy is. 

In its nearly 10-year history, portfolio managers have learned that the market — the indicators — rarely produce a forecast that’s on either extreme of that positioning range, Bakosova noted. “We almost never see everything going in one direction. It’s often mixed information muting the signal. It’s very rare to see everything screaming either bullish or bearish.” 

As noted, HTUS’s long exposure to the S&P 500 has come down in recent months. The fund is taking a more cautious position, as valuations are high, near market tops. The strategy also tracks several technical indicators that look at the percentage of new highs and new lows in the S&P 500, and at the dispersion between winners and losers. It considers things like shipping costs, driven by oil prices and expectations of shipping activity, as a proxy indicator for how the market is feeling about rates, inflation, and tariffs.   

“Some of these technical indicators are showing us there are jitters in the market and telling us to be a little cautious,” Bakosova said. 

The fund describes itself as predictive, aiming to invest for where the S&P 500 is going to in the next day. 

“If it sits at 80% today, it tells you that we expect market returns to be positive and to be higher than the risk-free rate, but below the average historical market return,” Bakosova said. Expectations for historical-average returns would equate to a 100% long exposure to the S&P 500. 

HTUS is an actively managed quantitative strategy that’s “almost purely” model driven. The idea is to rely on the data and remove emotion and opinion from the allocation process. But the manager does play a crucial role in ensuring the quality of the process. 

Everyday, portfolio managers review the signals, the inputs going into the models. That step is not intended to override them, but it’s meant to verify the integrity and quality of the data. It’s essentially an oversight role. 

The fund repositions its portfolio on a daily basis. In ETF land, that often means higher transactional costs to the end investor. But, according to Bakosova, Hull Tactical’s effort to continuously improve on the use of data to inform market positioning extends to its use of data to optimize trading and execution.

As she puts it, the managers carefully monitor trades and slippage. So far, they have found that daily turnover hasn’t chipped away at the incremental benefits the strategy offers. But that daily-rebalance design is also the reason why HTUS relies solely on some of the most liquid securities in the market, such as the S&P 500, SPX options and futures. Tradability is key for this portfolio.

HTUS sets out to improve the returns of the S&P 500, without increasing the volatility, according to Bakosova. 

“Yes, you should have an allocation to large caps, but you can do a little better if you consider all of this data that’s available to you,” she said. 

Remain invested in the market, broadly speaking, and in the S&P 500 specifically. But one allocation idea is to replace some of a portfolio’s core S&P 500 collocation with a hedge-fund-like quant strategy, like HTUS, to enhance risk-adjusted returns. 

“It’s been a smart move to be invested in the S&P 500, but with HTUS, you get a little extra,” she said. “We are not a hedge fund strategy, but HTUS works like a hedge fund overlay or a quantitative trade above your traditional S&P 500 exposure.”

HTUS also has an options component that counts into the long S&P 500 position, but offers some additional return in the form of income.  

HTUS is one example of the many gems in the alternatives ETFs category, which include many types of strategies. 

To continue your due diligence in this space and check out other long/short ETFs, visit our Alternatives ETFs list here.

For more news, information, and strategy, visit ETFDB.