Connecticut-based asset manager Active Alts, founded by ETF industry veteran Brad Lamensdorf, has launched the Active Alts Contrarian ETF (Nasdaq: SQZZ), an actively managed ETF that pursues a contrarian strategy by investing in companies with solid fundamentals that have very large short positions.
Brad Lamensdorf, Founder of Active Alts.
The fund effectively seeks to take advantage of ‘short squeezes’ – a rapid increase in the price of a stock that occurs when there is a lack of supply and an excess of demand for the stock. Short squeezes result when short sellers cover their positions on a stock, resulting in buying volume that drives the stock price up.
“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 ETF invests in securities with market capitalizations of $250 million or greater with at least $1 million a day in trading volume. The strategy does not have to be fully invested at all times, and may raise 100% cash if warranted by market conditions, a flexibility which may allow the fund to outperform in bear markets.
As a secondary investment strategy, Lamensdorf intends to lend out the hard-to-borrow securities to boost the income profile of the fund.
Moreover, 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— the payment is kept by the bank or broker. SQZZ is not typical; when it loans securities, the bank will pay the ETF the majority of the interest it may earn.
“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.
The ETF has a total annual operating expense of 1.95%, after fee reimbursements.