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Shorting and hedging can be dangerous for investors that don't have the experience or mindset to do so. An actively managed shorting instrument may better to use if you have a negative view on the markets but don't want to simply short an index. The AdvisorShares Active Bear ETF (HDGE) is a good option and one that I've occasionally used. It provides enough diversification to not get caught with one bad choice, and is actively managed by a team of focused short-only managers.

In fact, the lead manager, John Del Vecchio, has had two articles published here on Seeking Alpha. To get a better idea of his approach, I recommend reading this article providing an overview on his 2012 short positions: "Finding Shorts Among Some Overpriced Consumer And Technology Names."

AdvisorShares Active Bear has a management fee of 1.5% and a total expense ratio of 3.29%. That may seem high to investors unfamiliar with shorting and hedging, but the additional expense comes from paying interest on their short positions. You'd have to pay the same on your individual positions, but this ETF's management team's experience will probably do it more efficiently than you. The ETF is large enough that you shouldn't have to worry about liquidity. Its assets are a touch above $150 million. Other details can be found at the fund's website.

The chart below shows the ETF's top ten holdings. These are current as of March 18, 2012 and make up 32.5% of the portfolio.

Ticker

Name

Weight

OPEN

OPENTABLE INC

-4.18%

BBY

BEST BUY CO INC

-4.04%

GT

GOODYEAR TIRE

-3.61%

KMX

CARMAX INC

-3.34%

HBI

HANESBRANDS INC

-3.11%

C

CITIGROUP INC

-2.90%

COL

ROCKWELL COLLINS

-2.88%

DECK

DECKERS OUTDOOR

-2.86%

CTCT

CONSTANT CONTACT INC

-2.84%

AMZN

AMAZON.COM INC

-2.75%

I don't agree that every stock on this list should be shorted. In fact, I would specifically rather be long Citigroup, but I would have done the same over 2011 and the stock dropped more than 40%. That's the purpose of holding an instrument like this: protection. I also think Amazon is a dangerous short, even though it's trading at a sky high multiple. I never like to bet against a great management team on valuation alone.

However, the point of using this ETF isn't to agree or disagree with each of their individual positions. You can short individual positions on your own, and seeing what an instrument like this holds may be a good place for ideas. The point is to rely on the ETF's management to create a broad portfolio of shorts that you can use to hedge a part or all of your portfolio.

It's better to use this ETF as a hedge, as it's designed to do, rather than as a way to generate positive returns. They will occasionally have successful short positions while the overall markets rise, but since it's a portfolio of shorts, it won't be positive on the whole in a positive market. In a declining market, however, it has shown to outperform.

There is a lot of market uncertainty over the next few months. With rising gas prices, a steep run-up in the stock market, and potential for conflict in Iran, it may be worthwhile to hedge a portion of your portfolio or take an outright net negative position. Holding individual shorts may be part of your plan, and using the Active Bear ETF is a good way to fill out your portfolio.

Source: Use An ETF To Hedge In An Uncertain Investing Climate