The recent geopolitical risk-induced hiccup in the equities market shows that investors are still at risk to swift and sudden turns. Exchange traded fund investors, though, may consider an alternative investment strategy to hedge against unwanted risks.
For instance, the AdvisorShares Ranger Equity Bear ETF (NYSEArca: HDGE), which tries to generate capital appreciation through short sales of domestic equities, tries to identify securities with low earnings quality or aggressive accounting which may be intended on the part of company management to mask operational deterioration and bolster the reported earnings per share over a short time period. This screen helps the fund hone in on those more at risk of a steep sell-off in periods of duress.
The Portfolio Manager also targets earnings driven events that may trigger a price decline of a security, such as downwards earnings revisions or reduced forward guidance.
While this strategy may be unpopular in an ongoing bull market condition, HDGE may help protect an investor’s portfolio.
“The stock market continues its remarkable run, but the prospect for a pullback always remains, especially in an environment continuously near or at record highs. The market can easily move in the other direction and an investment portfolio can follow suit,” according to AdvisorShares.
Investors may utilize something like HDGE that actively sells short individual stocks during all market conditions in an attempt to protect a portfolio during both unexpected market drawdowns and from companies that cook the books in their accounting.
Related: World’s Largest Hedge Fund Endorses Gold
The strategy will outperform during periods of market drawdowns. For instance, HDGE gained 1.8% over the past week while the S&P 500 fell 1.4%.
Potential investors should be aware that alternative investments like HDGE are not meant as growth strategies to generate outsized returns in investment portfolios. In reality, these strategies are doing exactly what they were made for, diminishing volatility. Consequently, in bullish market conditions, the strategy may underperform, but if the markets turn, alts can shine.
For more information on alternative strategies, visit our alternatives category.