Hedge funds’ popularity continues to rise. Investors are attracted to the potential of these highly sophisticated investments to deliver market-beating returns as well as downside protection. But few investors can handle the high investment minimum of many hedge funds, nor can they tolerate tying their assets up in these relatively illiquid strategies.
WBI Investments is changing that — making the sophisticated investment strategies of expensive hedge funds available to investors through a suite of exchange-traded funds at a fraction of the cost. With these actively managed ETF products, WBI aims to deliver to investors the upside of rising markets while also minimizing losses during down markets. The central goal: protecting and preserving capital, not chasing returns. “We’re one of the most sophisticated ETF products out there,” says Matt Schreiber, President and Chief Investment Strategist of the Red Bank, N.J.-based firm. “But our sophistication is meant to lower risk on both the buy and sell sides, within a product that’s readily available to every investor in America.”
Choosing stocks carefully
One of the primary perceived dangers of active management is that it can perpetuate the “buy high, sell low” human impulses that cloud even the savviest investing expert’s decisions. WBI aims to all but remove human error and emotion from the investing equation through a multi-factor quantitative management system.
Under this system, a proprietary security selection software filters thousands of domestic and international stocks through factors including value and revenue trends. Preference goes to dependable companies with strong fundamentals and large dividend yields. Price momentum is another factor WBI considers in a bid to minimize the risk of buying a high-flying stock right before broader corporate and market circumstances send the price tumbling.
Selling before a fall
Schreiber notes the importance of not only choosing wisely in an up market, but also of minimizing losses in a down market. This dual philosophy is neatly illustrated in WBI’s half-bull, half-bear logo. Schreiber points out that in pursuing returns, many investors overlook the simple math that it’s easier to lose money in the market than to grow it back. For instance, a $100,000 portfolio that falls 20% to $80,000 would need to grow 25% – not 20% – to bring that $80,000 up to $100,000 again.
In rising markets, WBI’s returns may not match those of high-flying ETFs. But by design, WBI’s ETFs aim to deliver more downside protection than many of their peers. The firm pursues this through a rigorous sell protocol. Under every invested position, WBI sets a dynamic trailing stop that tightens as the security grows. So the higher a security rises, the less it would then have to fall to trigger a sale by the fund, locking in nearly all gains to that point and freeing up cash for new investments. This strategy allows investors to pare back risk and harvest gains systematically. And by better preserving capital in a market downswing, investors then compound growth more efficiently during the inevitable rebound.
By striving to dodge the risks inherent to both impulse-buying and index-tracking, WBI offers a fresh case for active management in today’s volatile market. “We are trying to lock in bull market participation, but also really manage risk on the downside,” says Schreiber. “At any given point we want our investors to be doing one of two things: gathering their investment gains or limiting their losses.”
An investment in the Funds is subject to risk, including the possible loss of principal. The Funds may invest in foreign and emerging market securities which carry additional risks than investing in the United States such as currency fluctuation, economic or financial instability, and lack of timely or reliable financial information or unfavorable political or legal developments. The Funds are subject to model risk, the investment process includes the use of proprietary models and analysis which rely on third party data and if inaccurate could adversely affect the Fund performance. The Funds may invest in Exchange Traded Funds (ETFs), mutual funds and Exchange Traded Notes (ETNs) which will subject the Funds to additional expenses of each ETF, mutual fund or ETN and risk of owning the underlying securities held by each. Options on securities may be subject to greater fluctuations in value than an investment in the underlying securities. Master Limited Partnership risk entails risks such as fluctuations in energy prices, decrease in supply of or demand for energy commodities. In addition, the Funds are subject to market risk, management risk, dividend risk, growth risk, value risk, debt security risk, high-yield security risk, small and medium company risk, portfolio turnover risk, securities business risk, mortgage-backed securities risk, and trading price risk. New ETFs may also be subject to “new fund” risk in that it has no operating history and that its strategy may not be viable over time.
Investors should consider the investment objectives, risks, charges, and expenses carefully before investing. For a prospectus and summary prospectus containing this and other information about the Fund please visit our website at www.wbietfs.com or call 1-800-772-5810. Read the prospectus carefully before investing.
Foreside Fund Services, LLC, Distributor
The sponsorship for this article was purchased by the New York Stock Exchange on behalf of WBI Investments.