Short selling is one of the more challenging areas of the
investment business. That is why I was excited to see the launch of
The Active Bear ETF (
) last week. About a decade ago, I worked with one of the portfolio
managers, John Del Vecchio, for a brief period of time. Since then
I have followed his career and research as he has put together an
impressive record of generating alpha exclusively on the short side
of the market.
I bought shares of HDGE and intend to hold them long-term for
several reasons. First, it acts as an insurance policy on my
portfolio. I have insurance for my home and my car. I want it for
my portfolio too. Also, because HDGE is actively managed, John and
his team can select stocks using his forensic accounting process to
generate alpha in any market environment. The performance record of
his Ranger Fund was impressive.According to
The Active Bear
website, Ranger respectively out-performed Federated Prudent Bear
Fund ((BEARX)) and the Grizzly Short Fund ((GRZZX)) by nearly 15%
and 21% compounded annually.
What's more is that HDGE (Ranger Short Only in the table below)
combined with other asset classes has provided smooth returns in a
very volatile market, which is why I intend to hold HDGE
click to enlarge images
The portfolio managers can change their exposure and the
dividend yield on the portfolio, which is something that passive
inverse ETFs cannot do because they just short the index. In
addition, HDGE does not use leverage or derivatives. The 2x and 3x
inverse funds have been proven to be a performance disaster and
show how the use of leverage can kill your returns.
HDGE also discloses its holdings daily, something that none of
its competitors do.
I can take a look at the portfolio and run it through my own
analysis. Stocks like Juniper Networks (
) and Green Mountain Coffee Roasters (
) look horribly overvalued to me.
Green Mountain Coffee Owners Earnings Table 1996-2011 (including
So, I think John is on the right track here as Green Mountain
generated $4.57 a share in cash flow per share since 1996 but had
to spend $4.55 in capital expenditures to do it, so their
Cumulative Owners Earnings ((COE)) is just $0.02 per share in all
the years under analysis. In 2011 Green Mountain is estimated to
generate $1.45 in cash flow per share and will spend $1.75 in
capital expenditures per share in order to do so. So you can see
why John shorted it.
John's performance has shown that he is a real pro in shorting
and by investing in his ETF I can diversify my work on the long
side (which I do using my Mycroft Research ((
)) System) by letting John do the all the work on the short
Finally, while the fees are closer to a mutual fund than most
ETFs, owning HDGE is much cheaper than the competing mutual funds
or shorting [[SPY]] and [[IWM]] since you have to pay the dividend
yield and other costs to borrow the ETFs. In addition, you get
seasoned short selling management only previously available in the
hedge fund world. Brad and John have over 30 years combined
experience. I'll take that over an inverse fund any day.
I am long
. No positions in the other funds mentioned.
For Pensions, 'Absolute Return' Strategies and
Other Non-Core Investments Are Back in Style