HDGE: 4th Quarter 2020 Portfolio Manager Review

Performance data quoted represents past performance and is no guarantee of future results. Current performance may be lower or higher than the performance data quoted. Investment return and principal value will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than original cost. Returns less than one year are not annualized. For the fund’s most recent standardized and month-end performance, please click www.advisorshares.com/etfs/hdge.

Performance

​For the fourth quarter 2020, the AdvisorShares Ranger Equity Bear ETF (NYSE Arca: HDGE) returned -8.76% while the S&P 500 returned 3.84%.

Markets Review

Market sentiment is now beyond euphoric. 

Sentiment is at generational highs.  This chart from Haver Analytics is instructive.  The shaded grey area highlights the 12-month forward returns, while the thin line is a measure of bullish sentiment.  We are marking sentiment not seen since the peak of the dot-com bubble in 2000.  Forward returns after periods of euphoria are negative.  When will the downturn happen?  With sentiment, valuations, and other factors positioned at the extremes, buckle up for 2021. No one can predict the future, but now is the time to hedge.

As one data point that highlights the practical result of such euphoria,  Bloomberg brings us the performance of stocks ranked by the profitability of the underlying companies.  Investors clearly favored the weakest stocks by this measure.  In order for a stock to rise 40% in 2020, it was likely a company that was both unprofitable and burning cash!  Companies that had the “misfortune” of being profitable underperformed the broader market.  We have been living through  a low-quality stock rally.

The same worrisome trend is seen when looking at the new issue market, or IPOs (initial public offerings).  The ratio of IPOs of money-losing companies to those generating income is staggering. The current situation is far and away worse than it was during the Internet Bubble.

While the trend higher can continue, we are increasingly skeptical that these gains will be sustained. When these factors swing back, the losses are likely to be steep.

One of the aggravating factors that will make any downdraft deeper is the widespread use of margin debt.  As the market climbs higher, investors are borrowing more and more on margin to increase their exposure.  This chart, courtesy of Advisor Perspectives, shows investor credit balances since 1995.  While margin balances have not quite returned to new highs yet, they are high and surging.

In the past, there have been peaks in margin balances right before significant sharp declines in the market. This is why we watch this metric so closely.

All of this unfettered bullishness takes place against a backdrop of extremely stretched valuations.  Siblis Research and Bloomberg bring us this chart, which lays out the percentage of companies in the S&P with P/E ratios above 30 and those with P/Es below 5.  As you can see, the proportion of these expensive stocks has superseded dot-com era levels.  The market became increasingly overvalued during the fourth quarter.

Internal factor behavior confirms these risks.  Two Rivers Analytics tracks a series of factors associated with speculative behavior.  These are considered granular measures of the types of stocks investors are buying at the moment.  Several of these risk factors are in deeply overstretched territory.  The stock of unprofitable companies have been sharply outperforming the broader market since October.  Momentum has been outperforming all year, with a sharp rally beginning November.  Low Return on Investment (ROI) companies have seen stocks rise all year, with another sharp rally from November.  Stocks with the highest short interest have risen dramatically recently, as have stocks of companies in aggressive industries.  All are signs that investors are chasing performance in the strongest “FOMO” (Fear of Missing Out)  rally in recent history.

Stocks were grouped and ranked by the relevant factor as of the end of the prior month and the returns computed for the month just ended. Stocks chosen were based on Two Rivers Analytics’ universe of stocks. © Copyright 2019. All Rights Reserved Two Rivers Analytics. Further Distribution Prohibited without prior permission.

 

Top Holdings

Ticker Security Description Portfolio Weight %
FCFS FIRSTCASH INC -4.70%
WHR WHIRLPOOL CORP -4.15%
BLKB BLACKBAUD INC -3.13%
CTXS CITRIX SYSTEMS INC -3.06%
EVBG EVERBRIDGE INC -3.00%
CACC CREDIT ACCEPTANCE CORP -2.90%
OLLI OLLIE’S BARGAIN OUTLET HOLDI -2.74%
HBI HANESBRANDS INC -2.69%
CSGS CSG SYSTEMS INTL INC -2.65%
AKAM AKAMAI TECHNOLOGIES INC -2.64%

As of 12.31.2020. Cash not included.

Respectfully,

Brad Lamensdorf
Ranger Alternative Management
AdvisorShares Ranger Equity Bear ETF (HDGE) Portfolio Manager

 

Definitions:

The S&P 500 Index is a free-float capitalization-weighted index based on the common stock prices of 500 American companies. It is one of the most commonly followed equity indices and many consider it the best representation of the market and a bellwether for the U.S. economy.

A Bear Market (Bearish) is a market condition in which the prices of securities are falling, and widespread pessimism causes the negative sentiment to be self-sustaining. As investors anticipate losses in a bear market and selling continues, pessimism only grows. Although figures can vary, for many, a downturn of 20% or more in multiple broad market indexes, such as the Dow Jones Industrial Average (DJIA) or Standard & Poor’s 500 Index (S&P 500), over at least a two-month period, is considered an entry into a bear market.

A Bull Market (Bullish) is a financial market of a group of securities in which prices are rising or are expected to rise. The term “bull market” is most often used to refer to the stock market, but can be applied to anything that is traded, such as bonds, currencies and commodities.

A short position is the sale of a borrowed investment with the expectation that it will decline in value.

Volatility is a statistical measure of the dispersion of returns for a given security or market index. Volatility can either be measured by using the standard deviation or variance between returns from that same security or market index. Commonly, the higher the volatility, the riskier the security.

Implied Volatility is the estimated volatility of a security’s price. In general, implied volatility increases when the market is bearish and decreases when the market is bullish. This is due to the common belief that bearish markets are more risky than bullish markets.

The Volatility Index (VIX) is the ticker symbol for the Chicago Board Options Exchange (CBOE) Volatility Index, which shows the market’s expectation of 30-day volatility. It is constructed using the implied volatilities of a wide range of S&P 500 index options. This volatility is meant
to be forward looking and is calculated from both calls and puts. The VIX is a widely used measure of market risk and is often referred to as the “investor fear gauge”. The VIX is a contrarian sentiment indicator that helps to determine when there is too much optimism or fear in the market.


Before investing you should carefully consider the Fund’s investment objectives, risks, charges and expenses. This and other information is in the prospectus, a copy of which may be obtained by visiting www.advisorshares.com. Please read the prospectus carefully before you invest. Foreside Fund Services, LLC, distributor.

There is no guarantee that the Fund will achieve its investment objective. An investment in the Fund is subject to risk, including the possible loss of principal amount invested. The Fund may invest in (or short) ETFs, ETNs and ETPs. In addition to the risks associated with such vehicles, investments, or reference assets in the case of ETNs, lack of liquidity can result in its value being more volatile than the underlying portfolio investment. Other Fund risks include market risk, equity risk, short sales and leverage risk, large cap risk, early closing risk, liquidity risk and trading risk. Short sales involve leverage because the Fund borrows securities and then sells them, effectively leveraging its assets. The use of leverage may magnify gains or losses for the Fund. See prospectus for specific risks and details.

Shares are bought and sold at market price (closing price) not NAV and are not individually redeemed from the Fund. Market price returns are based on the midpoint of the bid/ask spread at 4:00 pm Eastern Time (when NAV is normally determined), and do not represent the return you would receive if you traded at other times. 

Holdings and allocations are subject to risks and change.

The views in this commentary are those of the portfolio manager and many not reflect his views on the date this material is distributed or any time thereafter. These views are intended to assist shareholders in understanding their investments and do not constitute investment advice.