Research Affiliates, ProShares Launch Long/Short ETF

An investor in the ETF would have 100% of their investment in the long side of the portfolio, which Arnott says serves as collateral for another 100% invested in the short side of the portfolio, so investors get “twice the exposure, which brings down the risk," Arnott says. “The long/short neutralized market beta, the largest source of risk in broadly diversified portfolios.” He says he expects the strategy “to make money in both environments.” He adds that “the concept has been tried since 1990 with good success,” and has been used in the “Fundamental Index Long/Short Limited Partnership from back in 2004.”

Arnott explains that the fund is expected to be “largely market and beta neutral” over the long term, with a “little bit of [market] sensitivity on a short-term basis.” The fund’s fact sheet notes that it offers: “Absolute returns—potential for favorable returns regardless of market direction.”

Arnott adds that if the market is “up more than 30%,” they expect a “double-digit win,” and if it is “down more than 30%,” they expect a “double digit win.”

It’s a portfolio for an investor who wants an “asset that can give you alpha without market [beta] exposure, it could be one of the safe havens,” according to Arnott.

It’s “important to understand that 10% is a win—a good, solid year—regardless if the market is up 30% or down 30%,” Arnott asserts. “If you’re bullish on stocks, you’re not going to use this. If you’re ferociously bearish you could use it as a safe haven.”

In a nutshell, the fund goes “long companies that are bigger in their economic footprint than their market cap gives them credit for—deep value companies; and short high flyer growth companies—so [right now] long Verizon and Bank of America, and short Google and Apple,” Arnott notes.