First and foremost is an exchange-traded fund from AlphaPro Management Inc. based on the launch yesterday of the S&P/TSX 60 130/30 Strategy index. Available in the coming days, the new ETF gives investors access to a long/ short strategy that has yet to gain mainstream traction in Canada despite widespread popularity south of the border.
"I would be surprised if this becomes a million-dollar product in the next few months, but long term we believe it will meet the core needs of investors looking for greater exposure to indexing strategies," said Srikant Dash, head of global research and design at S&P Indices.
In general, 130/30 strategies commit 30% of their capital to offsetting allocations in short and leveraged long positions. By doing so, investors are exposed to systematic risk similar to that of a long-only portfolio but, in theory, they can also expect greater returns.
The new 130/30 strategy index consists of a core market weight position in the S&P/TSX 60 with an overweight position in a long basket of 10 stocks also listed on the large-cap benchmark, and an offsetting underweight position in a short basket of 10 constituent stocks.
The top 10-ranked stocks are overweight the benchmark, the 10 stocks with the lowest ranking are underweight and the remaining equities listed on the S&P/TSX remain market weight.
Back-tested performance for the strategy index has been favourable compared with the S&P/TSX 60, with the five-year compounded annual growth rate equal to 13.56% versus 10.67%.
Mr. Dash said there is a significant educational element to this strategy, but once over the learning curve, investors will be drawn to "its potential for risk-managed outperformance."
Less complicated perhaps, but no less intriguing, Man Investments Canada Corp., a subsidiary of U.K.-based Man Group PLC, one of the biggest hedge fund providers in the world, in December launched the Man AHL DP Fund, a mutual fund that offers weekly liquidity and a minimum required investment of $5,000.
Managed in accordance with the Man Group's long-established AHL Diversified Programme, the new Canadian fund uses the futures market to employ a quantitative approach known as trend following.
Investments are selected by exploiting persistent trends in various financial markets, including stocks, bonds, currencies, commodities and even interest rates. When an uptrend is established, the fund will quickly build a long position in a market or security. In opposite, a downtrend will result in a short position.
"We do not make bets on what may happen six months from now," AHL portfolio manager Keith Balmer said in a presentation. "Instead we react to the trend in the market, build a position and profit as long as that trend continues."
Mr. Ballmer said the longer the trend, the more profitable the returns. However, when trends do reverse course, the fund is susceptible to some degree of losses as it moves from long to short positions and vice-versa. Small losses are also common in periods when markets are range-bound.
"We don't know when trends will reverse, but we react very quickly and usually only lose a small amount of the profit gained from the [previous] trend," he said.
Largely uncorrelated to other asset classes, the Man AHL Diversified Programme has returned 17.6% per year since 1996 versus 3.2% for world stocks and 6.4% for bonds. Over that same period, the worst drawdown, or longest period of poor performance, was -17.9% from October 2001 to May 2002. The worst drawdown for world stocks, meanwhile, is -52% from Oct 2007 to now and -2.7% for world bonds.
