ETF Edge

Long-short ETFs offer investors a 'smarter way to hedge,' fund manager says as demand rises

Long-short ETFs see rising interest — AdvisorShares CEO breaks down the strategy
Long-short ETFs see rising interest — AdvisorShares CEO breaks down the strategy

ETF investors are looking to hedge their bets.

Demand has been rising for long-short exchange-traded fund in recent weeks as buyers grew more concerned about weak economic conditions trickling down to stocks.

Earnings season may have accelerated the rush to those funds, which leverage short-selling — borrowing shares of a stock in order to bet against it for profit — to give investors exposure they may not get in a traditionally structured portfolio.

Noah Hamman, founder and CEO of AdvisorShares, presides over two such funds, both of which are actively managed: the AdvisorShares Ranger Equity Bear ETF (HDGE) and the AdvisorShares Dorsey Wright Short ETF (DWSH).

HDGE, up 3.5% year to date, is "your ability to invest in a typical short-selling manager with transparency, as you can see our short positions on the site," Hamman said Monday on CNBC's "ETF Edge," adding that it has seen "a lot of demand."

"It's got a unique investment style where it's fundamentally driven, has a bit of a forensic accounting approach, but they are looking for opportunities to short where companies could struggle meeting their earnings estimates and earnings guidance," Hamman said. "So, not saying they're bad companies, but just saying the companies might struggle hitting their numbers, and thus it becomes a good opportunity to profit from a short perspective."

HDGE's top five holdings are Credit Acceptance Corp., Align Technology, HSBC Holdings, AT&T and Hilton Grand Vacations.

Typical holdings are often stocks of "companies that have had increased earnings, but they've maybe achieved it through buybacks," Hamman said. "Fewer outstanding shares, same level of earnings. It might look like it's increasing on a per-share basis, and maybe those stocks have moved up in the market because of that. But when those types of things stop or they become more difficult to do, that's a company you want to look at to try to find the right opportunity to short."

Other HDGE holdings tend to be companies exhibiting more fundamentally driven weakness, such as those already struggling with and anticipating more earnings declines, the CEO said.

The strategy is "probably more art ... than science, but we are looking at the numbers to make those determinations," Hamman said.

Unlike other ETFs, many of which rebalance their holdings daily or quarterly, HDGE is also unique in that it has "no set rebalancing time frame" or weighting system, Hamman said, calling it "conviction-weighted."

HDGE's managers are making "constant adjustments," he said. "In a short fund, you've got to constantly manage your exposure, especially on more volatile days, to make sure that the assets in the fund are matching up with how much short exposure we have."

AdvisorShares' other alternative fund, DWSH, is less about conviction and more about momentum, Hamman said.

That fund, which is up more than 6% year to date, shorts the stocks of large-cap companies exhibiting low relative strength — in other words, lagging the market.

DWSH's strategy is "very unemotional, very disciplined, very quantitative in nature," Hamman said. Its top five holdings are Nu Skin Enterprises, Marathon Oil Corp., Core Laboratories, Patterson-UTI Energy and Cimarex Energy.

"You'll see the portfolio turn over probably quite a bit more in this portfolio, whereas in HDGE, they're making that fundamental decision," Hamman said. "But it's part of our approach to really diversify where you're getting your alpha exposure."

And while Hamman was 'not saying that the fundamental approach is always going to work and not saying the technical approach is always going to work," there are certainly times, like in 2020, when HDGE and DWSH will outperform the broader market, he said.

"Used combined in a portfolio, [they're] probably a smarter way to hedge some of your long positions," he said.