Category Archives: etf

The Best And Worst Of January: Market-Neutral Funds

Market-neutral mutual funds and ETFs posted aggregated loses of 0.14% in January, bringing their one-year totals through January 31 to a near-flat +0.01%. Market-neutral funds, which seek a balance between long and short equity positions in pursuit of returns that are uncorrelated with the broad market, have had an ultra-low beta of 0.13, relative to the Barclays U.S. Aggregate Bond Index, for the year ending January 31, but have averaged just 0.04% of alpha over that time. Average volatility of the funds has been low, as the category has an aggregate one-year standard deviation of just 4.89%; but risk-adjusted returns have been unimpressive, with the average fund in the category sporting a one-year Sharpe ratio of -0.16. Top Performers in January The three best-performing market-neutral funds in January were: QuantShares U.S. Market Neutral Anti-Beta ETF (NYSEARCA: BTAL ) Hussman Strategic Growth Fund Inv (MUTF: HSGFX ) Cognios Market Neutral Large Cap Fund Inst (MUTF: COGIX ) The QuantShares U.S. Market Neutral Anti-Beta ETF ( BTAL ) was January’s top-performing market-neutral product, posting monthly gains of a whopping 9.48%! For the year ending January 31, the fund was up 6.24%, generating 9.81% of alpha with a beta of 3.96, relative to the Barclays U.S. Aggregate Bond Index. That high beta may not be attractive to market-neutral investors despite the bullish returns, and the ETF’s 13.58% one-year standard deviation falls at the top of the rankings for the category. Among the 58 funds in the category with a 1-year track record, BTAL earned a one-year Sharpe ratio – a measure of risk-adjusted performance – of 0.66, outperforming all but 13 funds. The Hussman Strategic Growth Fund Inv ( HSGFX ) was among the top-performing market-neutral mutual funds in January, ranking second only to the above ETF in the category. The fund’s January returns of +5.01% weren’t enough to push it into the black for the year, though, as it was down 6.91% for the 12 months ending January 31. HSGFX produced a -6.25% alpha over the past year, with a beta of 1.53 and volatility of 11.94%. This yielded a one-year Sharpe ratio of -0.55 – not the worst in the category, but certainly worse than the category average. The Cognios Market Neutral Large Cap Fund Inst ( COGIX ) ranked third in January, with returns of +4.29%. For the year ending January 31, the fund’s gains of 10.16% ranked in the top 2% of the Morningstar Market Neutral category. Those gains break down into a 1.66 beta and 10.27% alpha, with a very nice 1.26 Sharpe ratio and 7.88% volatility. The fund, which launched on the last day of 2012, had annualized three-year gains of 7.87%, earning it a five-star rating from Morningstar . Bottom Performers in January The three worst-performing market-neutral funds in January were: Highland HFR Event-Driven Activist ETF (NYSEARCA: DRVN ) Schooner Hedged Alternative Income Fund Inst (MUTF: SHAIX ) Turner Titan Long/Short Fund Inst (MUTF: TSPEX ) An ETF was the top-performing market-neutral fund in January, and an ETF was the worst performer: The Highland HFR Event-Driven Activist ETF ( DRVN ) fell 8.50% for the month, making it the category’s worst by a wide margin. The fund only launched on May 29, 2015, and thus, doesn’t have longer-term performance numbers to analyze. The Schooner Hedged Alternative Income Fund Inst ( SHAIX ) lost 3.91% in January, but still held on to a +1.88% one-year return through January 31. The fund had a beta of -1.58 over the past year and generated an alpha of 1.67%. Its annualized volatility of 6.62% was the lowest of any fund reviewed this month. All of this adds up to a decent Sharpe ratio of 0.30. Finally, the Turner Titan Long/Short Fund Inst (TPSEX) had the third-worst performance of all market-neutral funds in January, with its shares falling 3.24% for the month. Nevertheless, the fund maintained one-year returns of +3.50% (an alpha of 3.36%) through January 31, with a beta of -1.22. TPSEX had annualized volatility of 7.27% through January 31, and a Sharpe ratio of 0.50. Past performance does not necessarily predict future results. Jason Seagraves contributed to this article.

You Do Not Get Paid For Knowing Yesterday’s News

You do not get paid for knowing yesterday’s news… unless you work as a pundit! In that case you just need to go on TV and repeat what you read that morning in the Wall Street Journal or the FT. Like the “B” student in a class, you learn the conventional wisdom and repeat it. You can sound very confident – even smug – and seem right because you are describing the past. For traders and investors, yesterday’s news is history – already reflected in market prices. Unlike other aspects of life, being well-informed provides you no edge. It might even be a disadvantage. The post-hoc explanations for market moves twist theory to fit perceptions. As humans, we crave to make sense of everything; we are very creative in finding explanations. This may build a view of the world that is quite wrong. Finding an investing or trading edge requires an accurate view of the future, not the past. You can do this in several ways: Better information – possession of facts not widely known; Speed – getting news faster and drawing the right conclusions; Interpretation of data – understanding and using an indicator or technique that is not widely followed; Contrarian investing Determine the conventional wisdom Find important mistakes in the popular, oft-repeated viewpoints Consider what sectors and stocks would benefit if there is a return to reality Examples If you start asking yourself the right questions, following the points listed above, you will find some fresh ideas. Here are a few examples: Information – There are many important facts that are not widely known. Worldwide demand for energy has increased every year, more this year than last. Using energy prices as a gauge for the world economy is too pessimistic. Bank exposure to energy companies is relatively modest and reserves are much better than in 2008. If you accept this information, you can shop economically sensitive companies and banks. This information is hiding in plain sight. Speed – Good luck with this approach! You really need to have a plan in advance and jump on breaking news, beating the computer algorithms. Indicators – The page-view payoff for pessimistic news has inflated the perceived probability of a recession. Insider buying has been strong in several crucial sectors. CEO’s generally express confidence about their own business, even when less optimistic about others. The relevant data is easy to find. Contrarian Analysis – The conventional wisdom has punished biotech because of a political debate about drug prices. Oil prices are seen as hovering at a permanently depressed level. Banks are targets for political rhetoric and exposed to bad loans. Apple is too big and lacks new products. And more. Do we really believe that an aging population will not embrace the new drug discoveries? That China, India, and other countries will not need enough energy to close a 1% gap between supply and demand? That banks will not escape the political noise with more profit? Conclusion I do not expect everyone to agree with the specific trade ideas in this post, but I hope readers will consider the basic approach. If you want trading or investment profits, think for yourself and think ahead! Reading the news only helps to know what others are doing. Disclosure: I am/we are long AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: I have positions in biotech, energy, cyclicals, and regional banks.