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Launch Date: January 26, 2011

Links: Website, Factsheet (pdf), Prospectus (pdf)

Investment Strategy

The AdvisorShares Active Bear ETF (NYSEARCA:HDGE) is an actively-managed ETF that looks for capital appreciation through shorting domestic US equities, making it a short-only fund. The fund is sub-advised by Ranger Alternative Management which utilizes a bottoms-up, fundamental, research driven security selection process. The managers rely on forensic accounting to look for companies that have low earnings quality or use aggressive accounting intended to mask operational deterioration and superficially enhance earnings. Other catalysts that play into security selection include downward estimate revisions and reduced guidance.

As of March 24th, 2011, the portfolio’s largest short position was Netgear Inc. (NASDAQ:NTGR), which had a -5.8% weight. Other than Netgear, top five holdings included Whirlpool Corp. (NYSE:WHR) (-5.5%), Salesforce.com (NYSE:CRM) (-5.29%), General Motors (NYSE:GM) (-5.16%) and VMWare Inc. (NYSE:VMW) (-4.81%). The sector exposure was also well diversified with Consumer Goods and Consumer Services being the largest shorts near the end of January. The average position size in the portfolio is typically between 2% – 7%, with between 20 and 50 holdings.

Portfolio Managers

Ranger Alternative Management serves as the sub-advisor to HDGE. The portfolio managers making the day-to-day decisions are:

John Del Vecchio – Portfolio Manager/Principal

Brad H. Lamensdorf – Portfolio Manager/Principal

The Numbers

Net Expense Ratio – 1.85% (with a fee waiver of 0.03%)

Market Cap – $46.0 million

Average Daily Volume – 136,933 shares

What’s special about it?

1. HDGE is the very first short-only active ETF to be launched in the US. It provides investors with a unique proposition and investment strategy that they usually do not have exposure or access to. Most investors essentially have long-only exposure and HDGE provides them with an alternate to take advantage of the down-side when markets are under stress.

2. By virtue of its mandate, HDGE has to identify poor companies and not good companies that the vast majority of portfolio managers focus on. This requires a very different skill set and portfolio managers behind HDGE rely on forensic accounting as the tool to find bad companies.

Performance

The Active Bear ETF has only been on the market for 2 months, a period too short to make a fair assessment of an active manager. However, the 3 month performance chart below of HDGE (green line) versus the S&P 500 (blue line) shows the expected inverse relationship.

The prospectus provides the historical performance of a fund comparable to HDGE, the Ranger Alternative Fund that has been run by the sub-advisor since Oct. 2007. Up till March 31, 2010, that portfolio had 1 year returns of -38.47%, compared to the S&P 500 return of 49.77%. Since inception though, the fund has returned 16.55%, while the S&P 500 has returned -8.01%.

click to enlarge

Analysis

Positives –

- HDGE clearly provides investors a good option if they are looking for a hedge for their long-only exposure. With a short-only portfolio, the portfolio will benefit when the market is under stress and other components of an investor’s portfolio might be performing poorly.

- The recent performance since launch and the historical performance of the comparable portfolio has been good in times that it should be and the managers cannot be faulted for performing poorly when the equity markets are going strong. The investment mandate of the portfolio, by definition, means underperformance during positively trending markets. However, they outperform the market significantly during periods like 2008 and early 2009.

Negatives –

- As with any portfolio hedge, there is a cost to hedging. With HDGE, that cost is the underperformance of the portfolio during good times. Now, whether the amount of underperformance during good times is enough to justify the cushion provided to investor portfolios by the outperformance during bad times, is something that investors have to decide for themselves.

- Many of HDGE’s top 10 short candidates over its short time in the market have been high beta, high momentum names like VMware, Amazon, Salesforce.com and Netgear. Names like these tend to move several times the market averages both in up and down markets. This could make the portfolio performance quite volatile with the fund’s fortunes really depending on the general market direction.

Disclosure: No positions in above-mentioned names.

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Source: AdvisorShares' Active Bear ETF: Pros and Cons