HDGE: 2nd Quarter 2021 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 second quarter of 2021, the AdvisorShares Ranger Equity Bear ETF (NYSE Arca: HDGE) lost -9.20% (NAV) while the S&P 500 Index gained 8.55%.

Markets Review

The market remains very expensive and technically stretched against a backdrop of unalloyed investor bullishness in our opinion. Morgan Stanley’s Composite Market Timing Indicator has reached levels rarely seen before. Specifically, it has reached current levels only five times over the past 30 years.  According to Morgan Stanley, “Each of our five market timing indicators is giving a sell signal at the same time.”

Coincident with Morgan Stanley’s indicators, bullish sentiment has stretched to unprecedented levels. This is a contrary indicator.  SentimentTrader (chart below) shows us that household equity ownership as a proportion of total financial assets has reached 36.5%. That is higher than the 32.5% level reached around the time of the internet bubble in 2000 and the 29.7% mark reached during the growth stock boom of the late 1960’s. We note that equity market returns, after reaching these peaks in the past, resulted in weak to negative equity returns.

In this environment, we continue to believe that individual stock-picking and hedged exposure will help manage risk better than index buy-and-hold investing.

Internal to the markets, investors have embraced speculative young companies and are pursuing high momentum stocks again. The rising values of unprofitable companies, be they pre-profitability technology or biotech companies, indicates that investors are very wiling to embrace risk. In potentially dangerous environments like today’s, investors tend to abandon caution and pursue even poor business models in the hope that a “greater fool” buys them out of mistakes.

Momentum stocks are a similar indicator of investor complacency. After a lull in the pursuit of momentum stocks early in the year, the most recent quarter shows us that investor fear of missing out on the next great trend is overwhelming the prudence that might make them abandon lower quality ventures.

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

For the second quarter of 2021, the largest realized and unrealized gains were Tupperware Brands Corporation (TUP), eHealth, Inc. (EHTH), Louisiana-Pacific Corporation (LPX)and Mercury Systems, Inc. (MRCY). Tupperware Brands (TUP) slid during June, ending the quarter down -10.07%.  Wall Street earnings estimates were cut, more than offsetting better news about debt reduction and a surprise stock buyback announcement by this well-known household plastic container company. eHealth (EHTH) fell effectively the entire quarter, ending down -19.70%. eHealth is a private health insurance exchange.  The company has been plagued with high churn rates in the customer base and the associated agent commission impact on earnings quality. The company added an activist-sponsored new board member in May. Louisiana-Pacific (LPX) has fallen from an early May peak, yet finished the quarter higher at 8.71%. This construction products company had seen its stock rise since late 2020 on building related to a flight from cities. Lumber prices had spiked on supply chain constraints and robust homebuilding activity.  However, the price trend appears to have gone too far, leading lumber prices to drop by more than half from May peaks. LPX stock fell in sympathy.

The largest realized and unrealized losses for the second quarter were BigCommerce Holdings Inc (BIGC), Stitch Fix, Inc. Class A (SFIX) and Fastly, Inc. Class A (FSLY). BigCommerce (BIGC) stock dithered all quarter but rose towards the end, finishing 12.32% higher. Analysts had reduced their target price forecasts for this ecommerce platform company. The reductions were based on disappointing earnings guidance that showed increasing losses for the company. Stitch Fix (SFIX) had a strong May, ending the quarter up 21.72%. It is a clothing ecommerce company. The stock beat expectations and rose on the news, although the stock drifted back down in June. Fastly (FSLY) overcame a May drop to end the quarter down just -11.41%. This edge cloud security software company disappointed investors with a weak growth forecast. The disappointment happened against a backdrop of fading confidence in profitless growth stocks. In June, however, several high-profile security breaches led investors to favor security software stocks and FSLY partly recovered.

Ticker Security Description Portfolio Weight %
GRUB JUST EAT TAKEAWAY-SPONS ADR -3.50%
APPF APPFOLIO INC – A -3.48%
EHTH EHEALTH INC -3.11%
PCG P G & E CORP -3.01%
WH WYNDHAM HOTELS & RESORTS INC -2.85%
BEKE KE HOLDINGS INC-ADR -2.82%
MKTX MARKETAXESS HOLDINGS INC -2.75%
FIVE FIVE BELOW -2.67%
MKC MCCORMICK & CO-NON VTG SHRS -2.62%
FSLY FASTLY INC – CLASS A -2.35%

As of 06.30.2021. Cash not included.

Respectfully,

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

 

Past Manager Commentary

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.