Noah Hamman: HDGE, The Tip Of An Iceberg

July 20, 2012


Murphy: It's perhaps unsurprising that in the current economic environment investors have been so focused on costs, but pricing of active ETFs is clearly an issue, isn't it?

Hamman: Pricing is a challenging element for us. Active management costs more because you have to pay for that manager. Is it worth it? Well, if they don't perform well, you can argue that it isn't. But if they do, then you can argue that it is. That's the case of just about everything in life. It's unfair to compare our costs to those of index ETFs—they don't have active managers, so in that sense, I don't get the price fixation in this space, but I understand the importance of building a team of solid managers, because that's what makes a difference.

Take AADR, for example--AdvisorShares' WMC/BNY Mellon Focused Growth ADR ETF (NYSEArca: AADR)--it brings institutional management to the MSCI EAFE space. They're 'killing it!' Their performance is like 800 basis points above the index since inception, at around 13 percent.

The iShares index-based equivalent, iShares MSCI EAFE Index Fund (NYSEArca: EFA), has returned just over 5.2 percent since AADR came to market. And even if you look at the iShares' MSCI EAFE Growth Index Fund (NYSEArca: EFG)—which you could argue is a better comparison to AADR's heavy focus on growth—that has returned 8 percent. You will pay more for AADR, but you will still be getting higher returns— even net fees. So, the performance is there, but getting the word out is another thing.

Murphy: Let's talk about your single most popular fund, the Active Bear ETF (NYSEArca: HDGE). Half of your assets are tied to that one ETF. What has made that particular strategy resonate with investors, particularly given that it's given up about 5.5 percent in value year-to-date?

Hamman: HDGE is just so unique, there's really nothing like it in the ETF space or even a really comparable strategy in the mutual fund space. It's all short—no leverage, no derivatives, just a truly short fund. A lot of investors have been moving away from leverage and derivatives with all the negative publicity around the risks involved with that, and our strategy is something you can hold for a longer time, even in a bull market because some equities will still go down in bull markets.

The way it's designed, it picks companies that struggle the most in a down market, and those tend to lose more than the broad stock market. In an up market, it picks the struggling companies at that time, who will benefit from broad stock market strength, but will still struggle. It's a balance. And one that has outperformed other funds, like the ProShares single beta Short S&P 500 (NYSEArca: SH) by as many as 1,000 basis points. So, yes, it's down year-to-date, but it has done very well relative to other strategies.

Murphy: What's next for AdvisorShares? Where are the untapped opportunities in the active management space?

Hamman: We have an equity hedge strategy coming up that uses hedge-fund replication techniques through factor analysis of hedge funds' track records. We look at performance returns and extract the strategies behind them. But we will do that in an active way rather than by passively copying what hedge fund managers are doing based on 13F regulatory filings like Global X's (NYSEArca: GURU), for instance. Passively trading on stale data from active managers seems like a strange notion, but there are statistics that say waiting that time frame for the filings doesn't matter that much. It's hard to argue against data. But I think that's an area where active management makes a lot of sense.

We also have an asset allocation fund with an options strategy around it that is designed to produce income scheduled for launch in September.


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