Q: It sure would have been nice to have had HDGE as an option during the 2008 crash, but the fund only recently launched, in 2011. Was this ETF a direct response to the market volatility after the financial crisis or was it something that came about separately?
A: I used to manage short portfolios as a private partnership into 2010. The idea for HDGE came from taking our process and making it available to everyone rather than just a few investors.
Q: Do you see this ETF as a profit vehicle, a “hedge” as the ticker implies or a bit of both?
A: Both. Everyone needs insurance. We get it for our cars and home (hopefully), but many people seem to forget it when it comes to their portfolio. Yet the stock market is far more likely to blow up several times than your house is likely to burn down. So for a slice of your portfolio, we think it makes sense as a good hedge.
Then, as you get bearish, you can ratchet up your exposure. Then it becomes less of a hedge and more of a profit vehicle.
Finally, because our portfolio is comprised of stocks we think will miss earnings, owning HDGE is a way to capture profit during earnings season from the companies we are short. If we get a significant portion of our research right in any given quarter, it doesn’t really matter what happens with the broader market.
Q: HDGE is currently at a 52-week low thanks to the recent bull market. Obviously, short-selling is hard in a rally as strong as the one we’ve seen since Thanksgiving. Do you ever go to cash when the uptrend seems unmistakable, or is this ETF always a play on the short side no matter the macro environment?
A: We raised a lot of cash near the market lows in October. However, we have been aggressively short in 2012 and held very little cash. That has obviously hurt us as the market — especially the small- and mid-cap growth stocks that we’re short right now — has raced higher.
We were surprised how fast the market got back to overbought and over-bullish conditions. Meanwhile, volume has been anemic during this move, and the number of 52-week highs is pathetic for such a strong rebound. What normally takes several quarters to achieve in terms of getting back to dangerous indicator levels for the market took less than a quarter. So we were aggressive again in shorting the market.
Once sentiment gets extremely bearish and the market is deeply oversold, we will again raise more cash. We are not even remotely close to that point right now, though.