Short selling is one of the more challenging areas of the investment business. That is why I was excited to see the launch of The Active Bear ETF (HDGE) last week. About a decade ago, I worked with one of the portfolio managers, John Del Vecchio, for a brief period of time. Since then I have followed his career and research as he has put together an impressive record of generating alpha exclusively on the short side of the market.
I bought shares of HDGE and intend to hold them long-term for several reasons. First, it acts as an insurance policy on my portfolio. I have insurance for my home and my car. I want it for my portfolio too. Also, because HDGE is actively managed, John and his team can select stocks using his forensic accounting process to generate alpha in any market environment. The performance record of his Ranger Fund was impressive. According to The Active Bear website, Ranger respectively out-performed Federated Prudent Bear Fund (BEARX) and the Grizzly Short Fund (GRZZX) by nearly 15% and 21% compounded annually.
What’s more is that HDGE (Ranger Short Only in the table below) combined with other asset classes has provided smooth returns in a very volatile market, which is why I intend to hold HDGE long-term.
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The portfolio managers can change their exposure and the dividend yield on the portfolio, which is something that passive inverse ETFs cannot do because they just short the index. In addition, HDGE does not use leverage or derivatives. The 2x and 3x inverse funds have been proven to be a performance disaster and show how the use of leverage can kill your returns.
HDGE also discloses its holdings daily, something that none of its competitors do.
Green Mountain Coffee Owners Earnings Table 1996-2011 (including estimates)
So, I think John is on the right track here as Green Mountain generated $4.57 a share in cash flow per share since 1996 but had to spend $4.55 in capital expenditures to do it, so their Cumulative Owners Earnings (COE) is just $0.02 per share in all the years under analysis. In 2011 Green Mountain is estimated to generate $1.45 in cash flow per share and will spend $1.75 in capital expenditures per share in order to do so. So you can see why John shorted it.
John’s performance has shown that he is a real pro in shorting and by investing in his ETF I can diversify my work on the long side (which I do using my Mycroft Research (MR) System) by letting John do the all the work on the short side.
Finally, while the fees are closer to a mutual fund than most ETFs, owning HDGE is much cheaper than the competing mutual funds or shorting SPY and IWM since you have to pay the dividend yield and other costs to borrow the ETFs. In addition, you get seasoned short selling management only previously available in the hedge fund world. Brad and John have over 30 years combined experience. I’ll take that over an inverse fund any day.
Disclosure: I am long HDGE. No positions in the other funds mentioned.