Markets have become more correlated and more volatile, and this has led many investors to consider alternative investment strategies, such as long-short equity. Traditionally, hedge funds have been the most prominent practitioners of long-short equity strategies, but liquid alternatives have lower fees, greater transparency, less complicated tax-filing requirements, and greater liquidity than hedge funds, and thus have become increasing popular.
Two Long-Short Equity ETFs
WisdomTree (NASDAQ:WETF), a leading sponsor of ETFs and other "ETPs" (exchange-traded products) recently launched a pair of alternative long/short equity funds:
- WisdomTree Dynamic Long/Short U.S. Equity Fund (BATS:DYLS), and
- WisdomTree Dynamic Bearish U.S. Equity Fund (BATS:DYB).
Both funds offer stock-selection strategies designed to add alpha within a core stock portfolio. The principal difference between the two funds is that DYLS is designed to hedge against market drawdowns with a dynamic hedge on the market, while DYB is designed to provide "more bearish" net positioning. Both ETFs have net-expense ratios of 0.48%.
"Data shows that blending a long/short index with traditional equity and bond allocations has improved risk-adjusted returns," said Jeremy Schwartz, WisdomTree's Director of Research, in a recent statement. "WisdomTree's strategies challenge the traditional long/short and hedge fund community with systematic, liquid long/short index-based ETFs. DYLS and DYB are designed to generate alpha at the core through quantitative and fundamental stock selection - while also having the ability to hedge market risk dynamically."
Systematic Tracking of Indices
DYLS tracks the WisdomTree Dynamic Long/Short U.S. Equity Index, which consists of long positions in approximately 100 U.S. large- and mid-cap stocks that meet eligibility requirements and have the best combined score based on fundamental growth and value signals, and short positions in the largest 500 U.S. companies. The long positions are weighted according to their volatility characteristics, while the short positions are weighted by market cap and designed to hedge against market risk. The long-portfolio will be 100% invested at all times, while the short portfolio will vary between 0% and 100% exposure based on "a quantitative rules-based market indicator that scores growth and value market signals."
DYB tracks the WisdomTree Dynamic Bearish U.S. Equity Index, which switches between long positions in the same stocks as DYLS and U.S. Treasurys. DYB's short portfolio is the same as DYLS's. The long equity portfolio can range from 0% to 100% while employing a "variable monthly hedge ratio" from 75% to 100% in the short portfolio. During times when the market indicator shows unattractive readings on valuation and growth characteristics, DYB can move to 100% exposure to U.S. Treasurys.
Both funds launched on December 23, 2015.
Jason Seagraves contributed to this article.