Why I Own HVPW

Justin Sibears, Managing Director

FIRM: Newfound Research LLC
LOCATION: Boston
FOUNDED: 2008
AUM: $500M
ETFs: 100%

When did you first invest in the ALPS U.S. Equity High Volatility Put Write ETF (HVPW)?

We added HVPW in July 2015.

What drew you to a put-writing ETF?

We view alternatives in two ways. First, as a complement to fixed income: They're a potential risk management tool that isn't quite as interest rate sensitive. Second, as a tool to cope with market turns that would potentially make the main asset classes ill-suited to be contributors of performance.

As a firm, we think we're getting into a period of potentially low equity market returns. So people who don't look beyond the core asset classes will be stuck with meager returns over the next 10 years, especially after accounting for inflation.

The reality is there will be good years and bad years, and there's a lot you can do for each. But what if you have a market that just doesn't go anywhere? That's a real risk. So a put-writing strategy, paired with other diversified strategies, is uniquely positioned to do very well precisely when equities do nothing at all.

Which other strategies have you paired with HVPW?

We pair it with equity long/short and managed futures, as well as more tactical positions, something like a bullish U.S. dollar position. We also have a VIX hedging strategy that we run.

So why use an ETF to implement a put-write strategy rather than doing it yourself?

Ultimately, we're cost-conscious. We could implement a put-write strategy ourselves, but from an operational perspective, it just isn't feasible. It requires a good amount of capital to do, which means we wouldn't be able to pair it with the other strategies that we also like for our clients.

Meanwhile, mutual funds that do this kind of thing are too expensive. There are some closed-end fund options, but you don't always have transparency into the strategy that they're running. Plus, you have to deal with premiums and discounts.

We want to hold HVPW as a sleeve, and ETFs are great for that. ETFs are also great because we have complete transparency into what the process is, and confidence that the process will stay the same. That's so important when you're talking about a put-write strategy. It's one thing if the manager of a large-cap equity ETF starts doing something other than what they told you they were going to do. But when you do that writing puts, things could get much riskier than you ever intended. As risk managers first and foremost, that's just not acceptable to us.

What drawbacks do you see to owning HVPW?

Like a lot of alternatives, I think a put-writing strategy can kind of trick you a bit. It can look very low volatility when the market's truly going sideways, but should the market get crazy, it can potentially have downside equal to—if not even greater—than the equity market itself.

And it can happen overnight. In the equity market, people know they can lose money in their investments. But it can be shocking to look at an ETF and see that, over three years, it's had pretty low volatility, only to wake up one day and it's down more than 30% in a month. That can happen with a put-write strategy.

So it's that downside risk—combined with the fact that the downside can come out of nowhere—that you really have to watch out for. That's why we pair HVPW with other things.