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HDGE: The Active Bear ETF Under The Microscope

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Thanks to a shaky economic situation, many investors have dialed back exposure to equities, preferring instead to wait things out in the bond market or even in cash. Yet, while some have taken this approach to investing in this difficult time, many have looked to the ETF world in order to provide new options that can potentially push portfolios far higher in the turmoil. After all, yields remain anemic across the curve and the Fed has yet to signal any revisions to this policy in the near term. In light of this, many have looked towards ‘alternatives’ in order to help juice returns while also diversifying portfolios in the process. While there is certainly no shortage of choices in this field, such as volatility ETPs and gold, one of the more interesting, and unknown, is undoubtedly the Active Bear ETF (HDGE - Free Report) from AdvisorShares.

This intriguing product looks to give investors exposure to a portfolio of domestic equity securities that are sold short, potentially acting as a hedge against broad market movements. The securities are selected for the fund based on the philosophy from Ranger Alternative Management which seeks to use a bottom-up, fundamental process to select securities for inclusion in the basket. In this process, the management team looks to indentify a number of companies that have low earnings quality or aggressive accounting which may be a signal that firms are attempting to hide deteriorating operations or are looking to boost EPS over the short term. The team also looks to identify earnings driven events that may act as a catalyst for a rapid price decline such as reduced guidance or earnings revisions to the downside.

By applying this strategy to the broad markets, investors are left with an active bear fund that is built for choppy trading like we have seen in recent months. The fund has about 35 securities in total with the biggest short positions going towards firms such as Hanesbrands (HBI - Free Report) , Aecom Tech (ACM - Free Report) and Rockwell Collins . In terms of sectors, consumer discretionary takes the top spot followed closely by tech, industrials, and health care. Investors should also note, however, that cash can also make up a large chunk of assets but this can rapidly change depending on market conditions.

Unfortunately, the cost for this forensic accounting approach is rather steep with the management fee running at 1.5% and the net expense ratio coming in at 3.29%. This rate is far higher than virtually every other ETF in the space and is even higher than most mutual funds. This is likely due in part to the relatively steep cost of selling shares short, especially when compared to the ease in which investors can go long in a particular company. With that being said, HDGE has certainly proven its worth in recent months as the economy has struggled to regain its footing. Since inception in late January, HDGE has crushed the broad market, gaining 15.5% compared to a loss of nearly 11.7% for the S&P 500 in the same time period. Meanwhile, over the past quarter, the results have been even more pronounced with HDGE gaining 27.5% compared to a 13.9% loss for the S&P 500.

Outsized gains like this have certainly gone a long way in terms of making the fund’s large management fee palpable to the general public, allowing HDGE to be a big winner in terms of AUM. In fact, the fund has close to $150 million in AUM, making it one of the most popular active ETFs on the market today and a likely cash cow for AdvisorShares.

So for investors seeking to make a short play on equities, or for those looking to just hedge out some of their broad market exposure in these uncertain times, HDGE could be a solid bet. The fund has been on quite the hot streak as of late and its focus on ‘weaker’ companies has likely allowed HDGE to crush the competition over the past few trading months. Just remember, while HDGE may be able to lead on the way down, it could have a difficult time keeping pace when broad markets are surging, as a rising tide could lift all boats. If this happens, some may begin to question the wisdom of buying this relatively pricey fund and abandon it for cheaper alternatives. With that being said, HDGE is really the only ETF option out there today that gives investors short exposure in a basket form, suggesting that for those looking for a new way to hedge in these uncertain times, this fund from AdvisorShares may be the way to go.

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