HDGE: A Better Way To Short The Market?

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Lets Talk ETFs
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Summary

  • The extreme bullish market action of the last month has left an increasing number of investors feeling a disconnect between a worsening macro-economic picture and lofty equity prices.
  • Using inverse or leveraged ETFs to short the market for more than very short periods of time presents a major potential risk in the form of compounding via daily resets.
  • The AdvisorShares Ranger Equity Bear ETF holds an actual portfolio of actively managed short positions, meaning bears don't need to worry about compounding losses over longer-term holding periods.
  • Two of the funds managers, Brad Lamensdorf and David Tice, join Let's Talk ETFs to discuss their outlook for markets and delve into their investing process, including specific names they're particularly bearish on.

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By Jonathan Liss

Between them, AdvisorShares Ranger Equity Bear ETF (NYSEARCA:HDGE) portfolio manager Brad Lamensdorf and Chief Investment Officer David Tice have more than 40 years of experience running short funds. David managed the Federated Prudent Bear Fund (BEARX) from 1996-2008, generating 8% annualized returns during his final 10 years at the fund versus a loss of 1.4% a year over the same period for the S&P 500. Meanwhile, in addition to co-managing HDGE, Brad has published a market-timing newsletter, LMTR.com, since 2013, offering timely insights into the likely direction of markets.

Already somewhat bearish about the market outlook for 2020 before the COVID-19 health crisis took center stage, Brad and David have become extremely bearish as stocks have run up more than 30% since the March 23, 2020 lows. They believe the ETF they manage, HDGE, is the perfect vehicle for investors looking for broad bearish exposure to take advantage of the current opportunity.

HDGE is different than standard "short" ETFs in that it actively selects stocks to borrow and sell short rather than using derivatives such as swaps or options to gain inverse exposure, requiring daily resets and a significant risk of compounding away gains the longer you hold them. The active management side of the equation is another benefit to investors, they cite, claiming that instead of broadly shorting an entire broad index like the S&P 500, they hand-pick stocks offering the greatest risk/reward on the short side, adding potential alpha along the way. They point to the February 19-March 23 sell-off period where the S&P 500 lost 37% versus a gain of nearly 50% for HDGE over the same period (of course, HDGE has given most of those gains back as the bull has roared back to life over the last five weeks).

On the latest episode of Let's Talk ETFs, David lays out his long-term bear case for U.S. markets, while Brad walks listeners through the inner workings of HDGE, including some of his favorite current short ideas. Whether you're currently, bullish, bearish, or undecided, I hope you find this conversation as useful as I did.

Show Notes

  • 3:00 - How do you explain the extremely bullish market action of the last month, since the March 23 low?

  • 5:15 - Once COVID-19 is resolved, will the economy and market snap back?

  • 8:30 - Who's debt buying right now?

  • 12:30 - What do you say to the "don't fight the Fed" argument?

  • 14:15 - Dynamics of inverse ETFs and how they differ in fundamental ways from HDGE.

  • 19:15 - Having to disclose your positions daily, is "front-running" a serious concern with HDGE?

  • 25:00 - Process for selecting or excluding short candidates (ZM) (CACC)

  • 31:15 - Why do you not have more currently allocated to energy sector shorts?

  • 33:30 - Why are you short so many financials at present?

  • 38:00 - How do you determine position sizes?

  • 39:30 - Names you're currently particularly bearish on: (CIT), (CACC), (SYF), (ABS), (W), (SC)

  • 45:45 - Predictions for the closing price on the S&P 500 on December, 31, 2020.

This article was written by

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7.07K Followers
Let’s Talk ETFs is Seeking Alpha's podcast dedicated to the exchange traded fund space. Hosted by Seeking Alpha’s ETF expert, Jonathan Liss, the podcast features long-form conversations with industry insiders, ETF issuers, asset managers and investment advisers to explore the ways in which ETFs continue to evolve, helping investors to reach their financial goals.

Disclosure: I am/we are long HDGE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: HDGE is currently short many of the stocks we mentioned in today's show. For a full list of holdings, updated daily, go to https://advisorshares.com/etfs/hdge.

Jonathan Liss currently has a small long position in HDGE.

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