An effective hedging tool for long-only equity holdings

By: AGFiQ Team • March 31, 2020

Since the 2008 Global Financial Crisis (“GFC”), when the term “tail risk” entered the general lexicon, investors embraced ways to insulate their portfolios against losses and dampen volatility in advance of the next “black swan” event. Assets flooded into new, liquid alternative, long-short and short-only funds in the name of creating portfolios that attempt to be better insulated from significant drawdowns with lower exposure to overall market risk.

Following the GFC, with equity markets having reached all-time highs and with volatility at historical lows, investors had become accustomed to making gains without the pullbacks that are associated with a healthy functioning market. As a result, many of the tools embraced in the aftermath of the GFC had gone to the wayside. With the arrival of COVID-19, we witnessed one of the most rapid market sell-offs in history in the first quarter of 2020. The market sell-off and sharp spikes in volatility have reminded market participants about the importance of managing the downside.

The fact remains that timing the market and predicting downdrafts is extremely difficult to do.

What if there were a solution that protects against downturns in the market but also allows for potential participation when markets are trending upwards, allowing for a long-term strategic allocation?

 

Introducing AGFiQ U.S. Market Neutral Anti-Beta Fund (BTAL) ETF

The AGFiQ U.S. Market Neutral Anti-Beta Fund (“BTAL”) employs a long-short approach aiming to track the Dow Jones U.S. Thematic Market Neutral Anti-Beta Index (“BTAL Index”). BTAL rebalances each month in an attempt to consistently maintain the desired exposure in the current market environment.

BTAL holds long positions in low beta stocks and short positions in high beta stocks. Because the long and short positions are held in equal weights, the ETF’s performance is determined by the difference in the rates of return of the long and short positions, the “spread return”.

At any given time, BTAL has approximately 200 long and 200 short positions. The value of long and short positions within any sector are equal, leading to sector neutrality. Being sector neutral ensures that the ETF isn’t simply long in traditional low beta sectors and short sectors that traditionally have higher betas, rather BTAL has a diversified exposure across all sectors.

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