The Active Alts Contrarian ETF (NASDAQ: SQZZ) debuted on the Nasdaq Market Wednesday. In this addition of #TradeTalks, Jill Malandrino, Global Markets Reporter at Nasdaq, is joined by Brad Lamensdorf, Portfolio Manager of SQZZ. Active Alts is focused on bringing innovative liquid alternative strategies utilizing the ETF product structure. Lamensdorf, the founder and portfolio manager of Active Alts, is also a principal and co-manager of the AdvisorShares Ranger Equity Bear ETF.
SQZZ seeks capital appreciation by investing in companies with solid fundamentals that have very large positions that are subject to a short squeeze. “We have three different buckets of stocks we consider highly shorted, including; high negative borrow rates, high notional shorts and high short interest ratios,” Lamensford explained. “A lot of times you come across stocks that the shorts are picking on and the trade becomes crowded like Weight Watchers (NYSE: WTW). The stock is over 60% short of the float, and when the company had good news out of earnings last month, WTW popped 50 percent.”
Short selling can be risky because the loss potential is unlimited. For example, if you are short a stock at $10 and it goes to $100, you are down $90 per share. Lamensdorf said that short sellers get caught in what traders call a “squeeze” when they are wrong and are forced to cover, which in turn causes the stock price to rise on the buying.
SQZZ will not allocate more than 20 percent to any one sector and aims to keep position size at about 1-2 percent, although the ETF can go as high as 5 percent. When the fund is fully invested, it expects to have 40-80 stocks in the portfolio. Market caps start at $200 million. The smaller the market cap, the smaller the position. SQZZ also has the ability to go to 100% cash in an effort to protect gains.
As a secondary investment strategy, SQZZ intends to lend out hard-to-borrow securities in an effort to earn a stream of income which has the potential to enhance total return. “When the fund buys a stock like WTW, not only am I trying to make return on the investment, but I also create a huge yield for the security we are in as well.”
Holdings and other relevant information on SQZZ can be found on the Active Alts website.
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