New York – John Del Vecchio, a forensic researcher with previous stints at CFRA and Behind the Numbers, recently launched a novel new investment vehicle, a short-only actively managed ETF, the Advisor Shares Active Bear ETF (HDGE). Del Vecchio’s initiative illustrates opportunities and challenges that research firms face in creating investment product derived from their intellectual capital.
Forensic research will be the core of the Active Bear ETF. According to the fund’s investment objective and methodology, potential warning signs are ranked in proportion to where they are located on the income statement – the higher up, the greater the cause for concern. Among the elements of reported financials that may be analyzed are revenue recognition policies, changes in inventory and reserves, and charges for restructuring and other non-recurring events.
The ETF will generally maintain between 20 and 50 short positions with between 2% and 7% exposure to any one name and will charge an expense ratio of 1.85%, making it the most expensive ETF listed in the U.S.
Del Vecchio has an excellent forensic research pedigree. Del Vecchio joined Howard Schilit’s Center for Financial Research and Analysis (CFRA, now part of Riskmetrics), working as one of a team of forensic analysts. “At CFRA I took away two key concepts,” he says. “First, every company is guilty until proven innocent. In other words, let the numbers and the nuance of the SEC filings, not management, tell you if business is good or not. Second, the higher up on the income statement a concern is, the more critical it is.”
After a couple of years, Del Vecchio went to work for David Tice at Behind the Numbers and continued to work with Tice when he moved into asset management. “I realized during my stint there that if I stick to accounting issues, I can find shorts that work even in a bull market,” he says. “Where I lost, almost all of the time, is when I strayed from this and wrote research on fundamental issues such as the health of the advertising market or iPods.”
Five years later, he departed from Tice’s firm to join Ranger Capital Group, a Dallas-based company that runs a hedge fund called Ranger Alternative Management. Ranger manages approximately $1.2 billion and Del Vecchio oversaw the fund’s short portfolio. He departed Ranger last year, setting up his own forensic research boutique, Parabolix Research Inc., and began work on the Active Bear ETF.
Del Vecchio partnered with Advisor Shares, which specializes in creating and marketing ETFs. Advisor Shares was instrumental in getting approvals from the Securities and Exchange Commission (SEC) and the New York Stock Exchange, which took a year. In the current environment, regulators are scrutinizing new investment products carefully, and it helped that his ETF does not use derivatives and has no leverage.
Another key ingredient was getting approval to use his audited track record from Ranger Capital. Track records are critical for investible products generally and ETFs in particular.
Del Vecchio has partnered with a trader who has experience trading for the Bass brothers, who adds a technical overlay to Del Vecchio’s analysis and decides when to enter and exit trades.
Del Vecchio is not concerned about the transparency of the portfolio in his ETF. “Secrecy is overblown,” he says. He maintains that one of his criteria is stocks that have low short interest, making short squeezes unlikely.
Del Vecchio’s career illustrates that one option for researchers is to put money where their mouth is. He moved from pure research to pure portfolio management when he joined Ranger Capital, and now has moved back to a bit of both. Launching an ETF is not necessarily something every research firm can aspire to, but Del Vecchio’s example can inspire research firms to think outside the box for new ways to monetize their intellectual capital.