In the span of 12 months, the Active Bear Exchange-Traded Fund (HDGE) has become a wirehouse darling. The fund has multiplied its assets eight-fold from $40 million in assets in January 2011 to $319 million at press time.
HDGE is an actively managed fund whose strategy is to invest only in short positions in the securities it chooses. The fund is managed by former hedge fund managers John Del Vecchio and Brad Lamensdorf, who now are portfolio managers for Ranger Alternatives in Dallas, Texas. Since inception on January 26, 2011, the fund has returned -2.58% as of June 27.
Money Management Executive spoke to the co-PMs about why they partnered up with AdvisorShares, which markets actively managed ETFs, and why wirehouses are making their fund a fund of choice among wealth managers.
Why did you two decide to launch the fund?
Lamensdorf: I'm a strong trading-oriented person and John is very forensically oriented. We decided to take the hedge fund, Ranger Short Only Portfolio, which wasn't gaining any asset traction even though our performance was very good, to put together the same strategy on an ETF platform.
Del Vecchio: It's the same process and strategy but now opening it up to everybody makes all the difference in the world. I think ETFs are the wave of the future. A lot of the advisors that I talk to have switched from asset allocation models of mutual funds to exclusively ETFs. My first conversation with AdvisorShares was in February 2009 and it was a very small market [then]. Harry Dent probably had the only active ETF out there at the time and it probably launched four months before I started talking to them. I wasn't really attuned to what active ETFs were but once I learned more about them, what really attracted me was the total transparency that they have, which I think is the future, and intra-day liquidity, which makes a difference because for mutual funds it's the end of the day.
How does the Bear ETF differ from, say, the Short S&P 500 Proshares (SH), ProShares UltraShort S&P 500 (SDS) or the Grizzly Short (GRZZX)?
Del Vecchio: Starting with the ProShares fund, first of all, we have no leverage and no derivatives. SDS, for instance, which is a 2x levered inverse fund, is a total disaster mathematically. The longer you hold it the greater the tracking error between the index and the fund because they're resetting that portfolio everyday. By the way, they reset SH everyday even though it is not levered, so you don't get the exposure you think you're getting.
We're also diffferent from the Grizzly Fund in that this fund has always been aggressively short, even if they're bullish. [Steven] Leuthhold used to run it and he was very bullish on the market at the lows in 2009, and yet he ran the fund as aggressively as he could on the short side, which to me makes no sense.
We have the ability, and this is really Brad's domain, to look at market indicators and the bigger picture in terms of liquidity and trading action in the market and either raise cash or change the individual securities in our portfolio that will perform better for us in certain market environments.
So even though we run a short-only fund, we're not always bearish so when we get bullish, we adjust the portfolio accordingly. That allows us to be more tactical than our competition.
Lamensdorf: Most of these products are inverse funds but major brokerage firms like Morgan Stanley and UBS around the country do not like inverse funds and do not approve the use of these funds for their wealth managers. Within one year, the same firms that disallow those products have allowed our product on their platforms and the reason is we're not an inverse fund. We're a publicly-traded investment company. If we're underperforming, it's because we're not picking stocks very well; it's not because our structure is flawed.
If you go look at SDS' or SH's perspectus, it's a one-day investment. I mean come on. You can't plan a wealth management allocation around a one-day investment.
The fund has a net expense ratio of 329 basis points and management fees of 150 bps. How do you explain your relatively high fees to investors?
Del Vecchio: People compare our fees to some of the other ETFs out there and they say it's a lot higher. But when you look at SDS and SH's management fee at 95 basis points, the dividend yield is embedded on the return of that fund so there's no such thing as a free lunch. You can't short the S&P 500 and not pay the dividend yield on it. So the dividend yield on the S&P is about 2.3% give or take so you have to add that back into their cost structure to account for the fact that they're short the S&P and they have to fund the dividend yield. That immediately makes those products more expensive than we are.
We can make the decision to short a dividend-yielding stock whereas the index cannot. It has to be short a Johnson & Johnson, which pays a 5% yield. We don't have to short that company so therefore we can manage our dividend yield much more effectively.
What else do you have in the works?
Del Vecchio: There are big platforms at investment banks that are interested in us so they're taking a look from an asset allocation perspective. There are also family offices with hedging programs that are looking at us.
I have a book coming out in September and it's not so much about the fund as it is about the process that's used. It's a book that anybody can read; it's not a textbook for a propeller head from MIT. The whole purpose of the book is to help you avoid future losses in your portfolio and I don't think a lot of portfolio managers out there have books that detail what they do so this will allow people to get more comfortable with who I am and what I do.