A fund that looks for red flags

Tired of searching for winning stocks? Active Bear focuses on the losers -- and has made a killing in the process.

By Zacks.com Nov 22, 2011 2:38PM

Image: Arrow Down (© Image Source/SuperStock)By: Zacks Equity Research


A shaky economy has caused many investors to dial back exposure to equities and wait things out in the bond market or even in cash. After all, yields remain anemic across the curve and the Federal Reserve has yet to signal any policy revisions in the near term.

But others have looked to exchange-traded funds for new options that can potentially push portfolios far higher in the turmoil. While there is certainly no shortage of choices in this field, one of the more interesting, and unknown, is the Active Bear ETF (HDGE) from AdvisorShares.


This intriguing fund looks to give investors exposure to domestic equities that are sold short, potentially acting as a hedge against broad market movements. Its securities are selected based on a philosophy from Ranger Alternative Management that focuses on a bottom-up, fundamental process.

The fund's management team looks for companies with low earnings quality or aggressive accounting -- possible signals of deteriorating operations or a firm looking to boost short-term earnings. The team also looks for earnings-driven events -- such as reduced guidance or downward earnings revisions -- that may trigger a rapid price decline.


Applying this strategy to the broad markets produces an active bear fund built for the choppy trading seen in recent months. The fund has about 35 securities, with the biggest short positions on Hanesbrands (HBI), Aecom Tech (ACM) and Rockwell Collins (COL). In terms of sectors, consumer discretionary takes the top spot followed closely by tech, industrials, and health care. 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 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 also likely due to the steep cost of selling shares short, especially when compared to the ease in which investors can go long. With that being said, HDGE has certainly proven its worth in recent months as the economy has struggled to regain its footing.

Since its inception in late January, HDGE has crushed the broad market, gaining 15.5% against a loss of nearly 11.7% for the S&P 500 Index ($INX) in the same period. The results have been even more pronounced over the past quarter, with HDGE up 27.5% against a 13.9% loss for the S&P 500.


Outsized gains like this go a long way toward making the fund’s management fees tolerable to the general public, and HDGE has grown to nearly $150 million in assets under management. It's become one of the most popular active ETFs on the market today and a likely cash cow for AdvisorShares.


For investors seeking to make a short play or just hedge out some broad market exposure in 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 it to crush the competition.

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. If this happens, some may begin to question the wisdom of this 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.


Read the full analyst report on "ACM" (registration  required)

Read the full analyst report on "COL" (registration required)

Read the full analyst report on "HBI" (registration required)

Zacks Investment Research

Tags: etf


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