Long/short strategies, previously the territory of high-level professional investors, have been made more accessible by exchange traded funds. That is a good thing because long/short funds can help lower the drawdowns experienced when markets tumble.
As a way to better manage potential drawdowns ahead, investors can look to a negative-beta strategy like the AGFiQ U.S. Market Neutral Anti Beta ETF (BTAL) to better manage hedging. BTAL acts as a type of long/short strategy that goes long low beta stocks and short high beta stocks. Consequently, the ETF strategy can produce positive returns any time low beta outperforms high beta.
“A long-short investment strategy differs from a long-only investment strategy in that an investor can also ‘short’ securities in the portfolio,” according to AGF research. “Removing the long-only constraint in a portfolio means that the securities ranked poorly by the model can be more than simply underweighted relative to the benchmark or absent from the portfolio, rather investors can actually short these names and benefit from their price depreciation. This results in the security exhibiting an effectively negative weight in the portfolio.”
In addition to the ease of managing one position as opposed to two or more, the expressed view captured in one ETF is also more cost-effective. Furthermore, it potentially gives an investor access to additional returns as opposed to a long-only or short-only position, provided the markets go in the perceived direction as intended.
Bank On BTAL
BTAL targets the Dow Jones U.S. Thematic Market Neutral Anti-Beta Index. The fund “strives to achieve this objective by investing long in U.S. equities that have below average betas and shorting those securities that have above average betas within sectors,” according to the issuer.
BTAL can also help investors implement desired factor exposures.
“A long-short approach can improve the investor’s ability to implement their model’s desired factor exposures and limit the exposure to other risks, namely the market,” according to AGF research. “This is measured by the Transfer Coefficient (TC), the degree to which the model’s suggestions are actively applied in the portfolio. A portfolio with a long-short implementation will have a higher TC and therefore a higher expectation of value added from active management due to the investor’s increased flexibility.”
When the market sells off and volatility rises, high-beta stocks tend to sell off more than low-beta stocks. On the other hand, during market recoveries, volatility diminishes and high-beta names outperform low-beta stocks.
BTAL is up 19.16% over the past year compared to 7.07% for the S&P 500.
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