It was over two and a half years ago when we first revealed that the only remaining "alpha strategy", one which has outperformed throughout the entire centrally-planned regime has been "Buying The Most Hated Names", i.e., betting on a short squeeze. It was then that one of our more entrepreneurial readers first suggested that "if anybody has a few million doing nothing, we could create an ETF.....and get paid some FEES for basically doing nothing."
Yesterday we learned that someone has indeed found a few million doing nothing, and taken this idea to the next level.
Presenting the ActiveAlts Short Squeeze Fund, aka SQZZ, which with a 1.85% expense ratio means the ETF sub-adviser is about to "get paid some FEES for basically doing nothing."
Besides the obvious, here is what the prospectus says is the ETF's main strategy:
The Fund seeks to achieve its investment objective by investing in exchange-traded U.S. equity securities and American Depository Receipts (“ADRs”) (collectively, “Equities”) that Active Alts Inc. (the “Sub-Adviser”) believes may be subject to a “short squeeze” (as described below). The Fund may also lend portfolio securities that the Sub-Adviser believes may become, based on its analysis, subject to a short squeeze. The Fund is an actively managed ETF and thus does not seek to replicate the performance of a specific index. Instead, the Fund uses an active investment strategy in an effort to meet its investment objective.
In selecting securities for the Fund’s portfolio, the Sub-Adviser uses a proprietary investment process (described in more detail below) to identify Equities that it believes have a higher potential for capital appreciation as a result of a short squeeze. A “short squeeze” occurs when investors who have sold short shares of an equity security are forced to cover or buy back the short position due to news or events that result in share appreciation. Often, the additional buying momentum created by short sellers covering their short positions escalates the increase in the price of the shares.
The Sub-Adviser’s process for identifying short squeeze opportunities involves analysis of both fundamental factors (e.g., quality of earnings, fundamental stability of business, etc.) and technical factors (e.g., price and volume characteristics, relative strength, etc.). Using this analysis, the Sub-Adviser seeks to identify securities where, in the opinion of the Sub-Adviser, short interest is significant, is increasing or is expected to increase, but is unjustified based on the Sub-Adviser’s analysis. The Sub-Adviser may also determine to lend out portfolio securities that the Sub-Adviser believes to be strong candidates for a short squeeze to short sellers and other market participants. The Fund will receive premium income in exchange for securities it lends.
Lots of words. Here, shown far more simply, is the chart that provoked this fund's creation: a chart we showed most recently in 2013.
Some more details on this inevitable development from ETF Trends:
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, for the fund’s secondary income objective, SQZZ can lend out securities from the fund’s underlying portfolio to short sellers and other market participants for a fee. [Making Sense of ETF Securities Lending]
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.
Brad Lamensdorf, founder and owner of Active Alts Inc., will manage the proposed short squeeze fund. Lamensdorf is no stranger to ETFs as he also helps manage the AdvisorShares Ranger Equity Bear ETF (NYSEArca: HDGE), which targets weak companies to short.
Who is Brad? Here is his LinkedIn profile.
Who is Ranger Alternatives?
“The Ranger Equity Bear”
Ranger Alternative Management, L.P. is the investment manager responsible for managing the Ranger Equity Bear ETF (NYSE Ticker: HDGE). HDGE is the first actively managed ETF, which invests on a short basis only in U.S. equities with the objective of generating positive relative risk-adjusted returns. The investment team implements a bottom-up, fundamental, research driven security selection process which seeks to identify securities with low earnings quality or aggressive accounting practices 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. In addition to these issues, Ranger seeks to identify earnings driven events that may act as a catalyst to the price decline of a security, such as downwards earnings revisions or reduced forward guidance.
So on one hand, Lamensdorf's HDGE ETF shorts companies, a strategy which without an offsetting pair trade under the new normal, has not exactly worked...
... and on the other, his new ETF, SQZZ, seeks to blow up shorts.
Sounds like a match made in mutually offsetting heaven.
Of course, Mr. Lamensdorf doesn't care how the ETFs actually perform as long as he pockets his 1.85% expense ratio on the SQZZ side and another 1.85% on the HDGE side, so a net pick up of 3.7% for investing in mutually offsetting positions.
In retrospect, a brilliant business plan, and one which as highlighted here, is about three years overdue.
Now the only question is what happens when another even bigger entrepreneur introduces SQEEL - the SQZZ inverse, or the short squeeze short squeeze fund, one whose only strategy is to go short the stock of SQZZ because now that the genie is finally out of the bottle, and the short squeeze strategy is finally out in the open, the logical next step will be to go short companies that have a big short interest because they will be shorted as a result of the anticipated squeeze sending them higher and thus providing a good short entry point.
And then, once get the levered squeeze funds, the fun really begins.
Finally, can we finally get the BTFD and BTFATH ETFs next please? Just as a monument to the successful take over of "markets" by the Fed's central planning.