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March 27, 2017 at 06:03 AM
ETF industry veteran Brad Lamensdorf launched the Active Alts Contrarian ETF (SQZZ), a “first-of-its-kind” actively managed ETF that seeks capital appreciation by investing in companies with solid fundamentals that have very large short positions and are subject to a short squeeze.
As a secondary investment strategy, Lamensdorf intends to lend out the hard-to-borrow securities in an effort to earn a stream of monthly income which has the potential to enhance the total return.
“SQZZ is the first ’40 Act fund to employ this novel strategy of seeking to capitalize on ‘short squeeze’ opportunities and generate potential income by getting paid for lending securities,” Lamensdorf, who is the founder and president of SQZZ’s sub-advisor, Active Alts, said in a statement.
The SQZZ ETF will screen securities that are highly shorted to isolate indications of unexpected values.
“Because of changing market conditions or smart management moves, highly shorted securities may have promising fundamentals, creating the potential for a profitable short squeeze,” Lamensdorf explains.
The SQZZ ETF invests in securities with market capitalization of $250 million or greater with at least $1 million a day in trading volume. According to Lamensdorf, the strategy does not have to be fully invested at all times, and it can raise 100% cash if warranted by market conditions, which may allow the fund to outperform in bear markets.
Until a short squeeze materializes, SQZZ investors earn current income by receiving the majority of the interest from banks who are paid by borrowers of the security.
Typically, when securities are loaned from an investor’s margin account, the investor earns nothing and the payment is kept by the bank or broker. However, when SQZZ loans securities, the bank will pay the ETF the majority of the interest it may earn, and that income goes to SQZZ investors in the form of a dividend.
“While securities lending is commonplace, SQZZ will be partnering with major banks to optimize which securities to lend and to get the most income for the fund, which may bolster returns,” Lamensdorf says.
SQZZ’s advisor is Rational Advisors, which received Securities and Exchange Commission approval to issue SQZZ.
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