Investors can now capitalize on a potential quick turnaround in a heavily shorted segment of the market through a new actively managed contrarian exchange traded fund play that bets on companies with heavily shorted positions.
On Wednesday, StrategyShares launched the Active Alts Contrarian ETF (NasdaqGM: SQZZ). SQZZ has a total expense ratio of 1.95%.
Brad Lamensdorf, founder and owner of Active Alts Inc., will manage the short squeeze fund. Lamensdorf is no stranger to ETFs as he also helps manage the AdvisorShares Ranger Equity Bear ETF (NYSEArca: HDGE), which focuses on weak companies to short.
“SQZZ is the first ’40 Act fund to employ this novel strategy of seeking to capitalize on “short squeeze” opportunities and generate potential income by getting paid for lending securities,” Lamensdorf said in a note.
SQZZ will try to generate current income and capital appreciation by investing in equity securities of domestic and foreign issuers traded on a U.S. exchange that the manager believes may be subject to a so-called short squeeze, along with cash and cash equivalents like money market funds and investment-grade short-term debt. The fund may even go 100% cash – it currently holds 85% cash, as it waits for opportunities.
The sub-advisor will pick out short squeeze opportunities through both fundamental factors, like quality of earnings and fundamental stability of business, along with technical factors, such as price and volume characteristics and relative strength. Additionally, the manager will identify securities where short interest is significant, rising or expected to increase.
Basically, the fund managers will pick out securities that have a higher potential for capital appreciation, which could result in a short squeeze.
A short position is a sale on a borrowed security. The investor needs to eventually return the borrowed stock by purchasing it back from the open market. If the price falls, the investor buys it back for less than he or she sold it for and pockets the profit.
A short squeeze occurs when investors with heavy short positions are forced to cover, or buy back, their shorts in the event of a sudden share appreciation – short sellers are essentially being squeezed out of their short positions, typically at a loss. Consequently, the additional buying momentum from short sellers covering their options contracts help bolster share prices even further.
Investors can identify securities at risk of a short squeeze by monitoring short interest – the total number of shares sold short as a percentage of total shares outstanding, along with the short-interest ratio – the total number of shares sold short divided by average daily volume.
Moreover, while investors wait for a short-squeeze to materialize, SQZZ can lend out securities from the fund’s underlying portfolio to short sellers and other market participants for a fee, which can generate income for investors in the form of dividends.
“While securities lending is commonplace, SQZZ will be partnering with major banks to optimize which securities to lend and to get the most income for the fund, which may bolster returns,” Lamensdorf added.
However, due to its frequent portfolio transactions, investors should be prepared for higher portfolio turnover and the potential tax consequences. The high turnover, which may involve commissions and other transaction fees, would also help explain the higher expense ratio for the fund.
For more information on new fund products, visit our new ETFs category.