HDGE Gathers Steam Despite High Fees

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What Is HDGE?

Don’t lump this fund in with other hedge-fund-style ETFs. Instead, think of the word “hedge” implied by the fund’s ticker in the context of directly hedging equity exposure that you have elsewhere in your portfolio.

From a performance point of view, the AdvisorShares Active Bear (HDGE) is an actively managed inverse equity fund. One look at the chart below showing HDGE’s returns against the SPDR S'P 500 (SPY) confirms this.

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HDGE vs SPY

This return pattern sets HDGE apart from the slew of hedge-fund-wannabe ETFs that generally aim for positive returns uncorrelated with major asset classes. But HDGE’s returns clearly show strong negative correlation with equities.

HDGE’s peers aren’t hedge-fund-style ETFs, but rather inverse U.S. equity funds; more specifically, unlevered inverse funds as opposed to those with -2x or -3x exposure. The chart below shows one-year returns for HDGE against the other top 1x inverse equity funds.

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HDGE vs Inverse

HDGE currently outpaces its 1x inverse equity competitors in terms of one-year returns as the table below shows. (HDGE’s peers are the ProShares Short S'P 500 (SH), the ProShares Short Russell 2000 (RWM), the ProShares Short Dow30 (DOG) and the ProShares Short QQQ (PSQ)).

 

 

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1-Yr Performance:HDGE vs 1x Inverse ETFs vs SPY

Besting your peers with a double-digit loss doesn’t sound too cheery. But consider that SPY returned 27.8 percent for the period, so a perfect imaginary 1x hedge would be down -27.8 percent, a number HDGE handily beat.

HDGE has given a bumpier ride along the way, however. Note the volatilities above:HDGE clocks in as second highest of the bunch (27.0 percent annualized daily volatility), behind RWM.

Except for HDGE, performance differences among these funds are driven the various equity markets they mirror; for example, the S'P 500 for SH; and the Russell 2000 for RWM.

HDGE is different. Instead of mirroring a passive equity index like its competitors, it actively selects a relative handful of securities to short. Still, the return and volatility snapshot above suggests the same old trade-off for HDGE—higher returns with higher risk.

Fees

No need to mince words. HDGE charges a ton:a whopping 3.29% annually. Peer funds cited above charge less than 1 percent.

High fees are a drag, literally and figuratively. But the performance figures above are net of fees. And taking direct short positions in equities isn’t cheap. HDGE’s prospectus breaks out the short interest expense at 1.44 percent. Add in the costs for active management and you get a hefty 3 percent+ fee.

The 1.85 percent cap stated on the fund’s home page is quite misleading, in my view, because it excludes the short interest mentioned above, so it shouldn’t be construed as an all-in number. (No need to take my word for it:See pages 2 and 10 of the prospectus.)

HDGE in Your Portfolio

Investors have put some real cash into HDGE. The table below shows AUM and net fund flows.

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AUM and Flows

I wonder why. Are they betting on outperformance from the fund’s managers, along the lines of Prudent Bear mutual funds and others? Or are they skirting the “inverse” label that applies to HDGE’s peers? Inverse funds are disallowed from some portfolios or barred from some advisors’ platforms. HDGE avoids the letter if not the spirit of any rules-based ban on “inverse” funds exposure in a portfolio.

Taking a step back, the case for hedging equity exposure in a portfolio in these uncertain times—using any of these funds—can make sense. For this purpose, the simple solution is to match the inverse fund to your equity position. If you’re long in QQQ, for example, then PSQ is the way to hedge.

Whatever the reason, HDGE has undeniably attracted major investor interest. If you want in, just be clear on what this fund is:a well-established, actively managed, unlevered U.S. equity inverse fund with a high fee and decent net performance results.

 

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