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Long-Short ETFs
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About Long-Short ETFs |
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Long-Short ETFs: Overview and forecast
Long-Short investment is an investment strategy which literally means buying
"long" on stocks or other market equities expected to rise, and "short" on
those expected to fall. There are only two of these ETFs on our chart, and
they're both quite new, but they're interesting studies.
The Long-Short ETFs are doing quite well, in some terms. They aren't big
traders, but they do a lot of things worth watching. ELEMENTS S&P CTI ETN
(LSC) is an ETF which uses Exchange Traded Notes, hence the ETN in the name.
During the horror period in November 2008 to January 2009, this ETF went up
from a low of $7.77 to $13.39. This reflects the "short" aspect.
The Long-Short ETFs operate on what is basically a hedging basis. They cover
both rises and falls, which on the face of it is a good strategy, in a murderous
market like the one in force during that period. That ETF has since gone down,
and is acting more like a trading stock than on a thematic basis.
The hedging approach is controversial in the market, despite its apparent
strength in this case. Short sellers haven't been doing too well lately, and in
terms of performance relative to other ETFs. Although both did exceptionally
well in the crash, and attracted very large volumes of sales, there are some
question marks. Their fall was as rapid as their rise.
Short term (6 months)
There isn't a "pattern" for the two Long-Short ETFs, but this ETF market is
volatile by any standards. The investment methodology puts them in a class of
their own. The short term, in this case, is almost as long as they've been
around. It's not a particularly good basis for analysis, given that they came into
existence during the most unusual market in living memory.
However, there are a few indicators that they're working as traders. LSC has
become a consistent trader, even in the relatively unspectacular period after
its big rise. That may be the most apt perspective for the short term, since the
Long-Short ETFs have a strategy which will naturally respond to the market as a
whole. Investors can afford to sit on the sidelines and see if they can perform
in the rising market as well. They've proved, so far, that they can handle a
falling market, but the "long" aspect hasn't done anything noticeable in these
time frames.
Medium term (2 years)
It would be melodramatic to assume that either of the Long-Short ETFs will set
the world on fire, or fall in a wet heap. One of the noticeable trends of the
other Long-Short ETF, Direxion Developed Markets Bear 3X Share (DPK), was
that after hitting its peak of $120-ish in March 2009, it dropped like a rock. It
started at $60 in December 2008, and went back to $60. It could be that the
"short" approach ran out of steam, or that the market dropped the ETF to
move capital elsewhere. That move represented a lot of money, and the sales
volumes only picked up during a mild revival later in March.
That may not be the fairest basis for evaluation, but it's the available
information from the charts. So the medium term forecast has to consider a
known relationship with price gravity. What went up did go down. The obvious
assessment of that performance by DPK, combined with LSC, is that these are
very jumpy investments. Again, the medium term needs to show some
performance.
Long term (5 years)
To do justice to these ETFs, after this rather tepid analysis, it's fairer to
consider that their real expertise hasn't had time to work. The problem with
any assessment of Long-Short ETFs is that the effectiveness of the strategy has
to show some credentials.
The hedging approach is strictly speaking a good approach. That said, not
everyone gets hedging right. Even the legendary hedge funds haven't been
unanimously successful in that regard. Both ETFs have shown talent in their
basic approach, in a murderous market. If you'd bought either of the Long-
Short ETFs at inception, you'd be breaking roughly even, if you hadn't taken
advantage of the price moves. That may be a good sign, or a reminder that
markets aren't there to break even. Investors will have to watch the Long-
Short ETFs and see if they can deliver consistently.
Qualifier to projections
There has been since the beginning of the ETFs, a long and often pointed
debate about "method" as a basis for investment. Not many pro investors
assume that there is naturally a magic formula for investment, in any market.
The counter argument is that some funds, hedge funds, ETFs, and others, are
particularly good at their own methods. They don't necessarily work for others,
but these funds do well.
The defining element is skill. Anyone can produce a formula, but only about 1%
can usually show really strong proof of success. Long-Short ETFs are playing a
very difficult strategy. They've had one big success, and a "blah" period after
that. Maybe novelty and their short positions drove up their prices, maybe
those price moves were backed up by good information.
Investors don't have to believe in methods. They do have the right to see
returns, before developing an interest.
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Last Updated on: 2010-01-14 02:03:40 |
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