ETF Offers ‘Short Squeeze’ Strategy
The Active Alts Contrarian ETF (SQZZ) makes its debut today. The fund, managed by Brad Lamensdorf, the co-manager of the $171 million AdvisorShares Ranger Equity Bear ETF (HDGE) and founder of Active Alts, will invest in companies that its managers believe could be subject to a short squeeze.
SQZZ is listed on the Nasdaq exchange and comes with an expense ratio of 1.95%.
“We see this as a huge opportunity in an area of the market that really has not been tamed yet, meaning there’s still a tremendous amount of opportunity and alpha to generate,” Lamensdorf noted. According to him, the fund should be considered a liquid alternatives strategy.
A short squeeze occurs when a heavily shorted security sees an unexpected price increase, and those holding the short positions are motivated to exit them at a loss. According to the prospectus, short squeezes can be exacerbated when position holders seek to buy shares of the stock to cover their positions, further driving up the price.
Lamensdorf says that when brokers’ supply of a heavily shorted stock is running low, they will charge interest to loan out shares. He points out that Weight Watchers, one of the stocks in the fund, has been loaned out at an interest rate of 23%, while the stock of GoPro at one point was loaned out at an interest rate of 100%.
“We came to the determination that it’s really impossible to create a passive situation in this trade. It has to be done actively, and the reason it has to be done actively is that to capture the alpha from the interest when working with the banks, it’s not something that is so mechanical. It’s very active. The lending departments aren’t going to giving you really solid interest rates off of the lending if your rotation of your portfolio is too quick, meaning they need more stable borrows,” Lamensdorf said in reference to the fund’s active approach.
SQZZ’s strategy relies on intensive technical and fundamental analysis to identify companies that are likely to see a short squeeze due to a significant but unjustified level of short interest. Individual holdings are limited to 5% of their public float and 5% of the total portfolio. Holdings must have market capitalizations of at least $250 million. Additionally, the portfolio can be allocated entirely to cash if necessary, or fully vested.
The prospectus also notes that the fund will seek to generate additional income via securities lending and can loan up to one-third of its total assets. Unlike many ETFs that engage in the practice, securities lending is an integral part of SQZZ’s strategy.
Contact Heather Bell at [email protected].