Think the market's going down? There are plenty of ETFs out there that let you take a bearish position on a wide variety of indexes.
For example, you could buy shares of the S&P 500 Short ETF (SH). This ETF tracks the inverse performance of the S&P 500 on a daily basis. If the S&P 500 ETF (SPY) goes down on a specific day, SH goes up by a similar percentage -- and vice versa.
Yet for more than two years now, an alternative has been available -- the Ranger Equity Bear ETF (HDGE). This is an actively managed ETF, so instead of synthetically tracking the inverse performance of SPY, the HDGE ETF is run by real human beings who manage a portfolio of actual short stock positions.
A recent post on HDGE by Lawrence Fuller did a pretty good job explaining how the fund works, its philosophy, and the approach taken by co-portfolio managers John Del Vecchio and Brad Lamensdorf.
John and Brad are experienced short sellers who look for opportunities to short stocks that may have low earnings quality, deteriorating fundamentals, or upcoming earnings-driven events that could be catalysts for price declines.
In the end, however, performance counts, so let's take a look to see if HDGE can deliver an edge.
The ups and downs of HDGE
During a bull market, a fund like HDGE is likely going to deliver losses, so I don't think this is one of those "set it and forget it" ETFs. Here's a look at three hypothetical $10,000 portfolios since HDGE began trading in early 2011.
The blue line shows HDGE. The red line shows the performance of the S&P 500 Short fund. Obviously both haven't performed very well at all considering that the SPY ETF (indicated by the grey line) has generated about a 29% gain.
But does an investment in HDGE do any better than simply buying the Short S&P 500 ETF? The answer is: it depends. Over certain time periods, such as the late spring and early summer of 2012, HDGE outperformed. Late in 2012 and into 2013, HDGE underperformed. Overall, the SH and HDGE portfolios ended up with about the same levels of losses.
More beta anyone?
It seems to me that there's a fairly significant variance in the performance chart. So here's a scatterplot chart that compares the weekly performance of HDGE vs. the SPY ETF.
As you can see, there's a highly negative correlation. That's obviously something you'd expect from a short-only fund. And while the negative correlation to SPY is strong, it isn't perfect. But again, I think you have to expect that from a fund that's managed by real live human beings, not synthetically generated through merely tracking an index.
But what you might not expect is that the fund's beta (at least the way I'm measuring it using weekly price change data) appears to come in at about -1.2 because that's the slope of the regression line. Therefore it would appear to me that over the time period since inception, the Ranger Equity Bear ETF tended to carry more high beta stocks (held short, of course) than the overall market.
That's neither good nor bad, but it's something to keep in mind if you use a fund like this as a hedging tool. Or to put it another way, if you want a beta that's closer to -1.0 and with a much tighter negative correlation, then SH is likely going to be your better choice as this chart shows.
A more volatile ride
You should also consider that HDGE is probably going to be more volatile than SPY -- at least based on past performance. Here's a look at one-month realized historical volatility for both SPY and HDGE.
In fact, since inception, HDGE has an overall realized historical volatility of 22.7% compared to about 18% for the SPY ETF over the same time frame (which is about the same as the S&P 500 Short SH ETF).
Once again, higher volatility is neither good nor bad in and of itself, but you should keep that in mind when deciding how much, if any, of your portfolio you'd put in a fund like HDGE at any given time.