There's lots of opportunity in stocks that aren't in these indexes, and I can capitalize on that because they're starting to get cheap relative to other stocks in the indexes. So there's value being created in stocks that are outside the indexes.
The price-to-sales ratio on the S&P 500 is as high as it was in 2000. Everybody's telling me this market isn't expensive, but earnings can be manipulated. That's why we short stocks; people get conned into thinking that companies can produce earnings.
But I can tell you one thing that can't be manipulated, and that's sales. Sales cannot be manipulated unless you're an outright fraud. We analyze sales very aggressively in HDGE to see the quality of earnings that are coming from the sales.
ETF.com: On HDGE, you short companies that have low earnings quality or use aggressive accounting policies. On SQZZ, you own companies you believe are about to face a short squeeze, but the majority of the portfolio is in cash. Why?
Lamensdorf: SQZZ, which is an actively managed fund, is going to be running much more like a hedge fund than an index. Right now, we have 60% cash, because I think nobody wants to own cash, and I think cash actually can be a very nice hedging-oriented feature for somebody who doesn't want to get annihilated in these market corrections.
The way to make a lot of money is to be a contrarian in the market. In my opinion, right now, everybody is on one side of the game. Everybody's indexing, and everybody's fully invested. But everything is very rich when everything couldn't look worse. Insider selling is at a seven-year high.
ETF.com: How do you make money out of that huge cash allocation in SQZZ? Is it about securities lending? And why would investors want to pay 1.95% in fees to own a portfolio that’s mostly in cash?
Lamensdorf: There are two things here: first, the SEC’s rule that no fund can lend over 33% of its notional value. So if I'm at 75%, it doesn't matter; I'm maxed out at 33%. So even if I were 33% invested, that's the maximum utilization I can do for the lending program. The investor's never going to get hurt by me being around 33% or more, because that's my max.
Secondly, if I'm expecting a 10-20% correction in stocks, I could certainly ratchet up my position sizes. And if I were looking for the market to get hit 10% or 20%, we'd probably be 100% invested, because at that point, sentiment would be very low, insider selling would have subsided, valuations would have gotten compressed some, and that’s where our investors actually can get some stocks at some good prices.
Unfortunately for me, the SEC held SQZZ up so long, I got to list it when I got to list it. Timing wasn’t great, but there's nothing really I can do about that. We've backtested a lot of different ways to run this program quantitatively. Every two or three years, this group of highly sorted stocks gets absolutely taken apart—down 20%, 30%. It's a complete whipping.
Again, I'm more of an absolute-return-oriented thinker. And that's why the fee is higher, because it's going to be run much more like a hedge fund and much less like some kind of index-oriented fund. Hedge fund managers think much differently than “plain vanilla” people who just put things to work and just slam it into the market. We're very delicate in the way that we move around. We don't like big losses.