Retail investors seeking an actively-managed short selling solution have traditionally had very few choices. The menu expanded last Thursday (1/27/11) with the introduction of AdvisorShares Active Bear ETF (HDGE), the first actively-managed short selling fund in an ETF format.
HDGE seeks capital appreciation through short sales of domestically traded equity securities. The fund typically consists of 20-50 short positions, with each receiving a 2%-7% allocation.
AdvisorShares is the advisor of record, but the ETF will actually be managed by subadvisor Ranger Alternative Management, LP. Portfolio managers John Del Vecchio and Brad H. Lamensdorf bring extensive short selling experience to the table. They employ a bottom-up, fundamental, research driven security selection process.
HDGE holds securities the managers believe have low earnings quality or aggressive accounting that could mask operational deterioration and bolster earnings per share. Additionally, the managers try to identify catalysts that may lead to the price decline of a security.
Portfolio construction consists of 6-8 “core” fundamental positions that the manager’s forensic accounting process has thoroughly vetted. Additional “tactical” trading positions are used to help manage volatility and enhance returns. HDGE Investment Philosophy & Portfolio Construction Process (pdf) provides further information about the methodology.
The 10 largest positions currently are Herbalife Ltd (HLF) -6.1%, Juniper Networks Inc (JNPR) -5.1%, Avon Products Inc (AVP) -4.9%, Bank Of America Corp (BAC) -4.0%, Kohls Corporation (KSS) -3.9%, Citrix Systems Inc (CTXS) -3.5%, Netapp Inc (NTAP) -3.4%, Visa Inc (V) -3.4%, Hasbro Inc (HAS) -3.4%, and Paccar Inc (PCAR) -3.4%.
Sector exposure presently consists of Consumer Goods 20.9%, Consumer Services 20.3%, Hardware 18.0%, Software 17.5%, Financial 8.7%, Telecom 6.4%, Business Services 5.2%, and Materials 2.9%. Market cap exposure is Large Cap 55%, Mid Cap 26%, and Small Cap 19%.
The expense ratio for HDGE is temporarily (until 9/21/11) capped at 1.85% with 1.0% going to Ranger and 0.50% going to AdvisorShares. The expenses for short selling funds typically include dividend payments, which the fund must make on securities held short. These “other” expenses have a 0.38% estimate that will vary based on holdings and will affect the total expense ratio once the cap is lifted in eight months.
Competition in the actively-managed short selling space includes Federated Prudent Bear (BEARX A shares, PBRCX C shares, and PBRIX Institutional) and (Leuthold) Grizzly Short (GRZZX no-load). BEARX has a management fee of 1.25% and an audited expense ratio of 1.73%. GRZZX has a management fee of 1.25% and an audited expense ratio of 3.53%.
Additional information is located in the HDGE press release, overview, fact sheet (pdf), and prospectus (pdf). Hypothetical performance data for the strategy is located on the Ranger website.