Mar 29, 2021
Technology companies’ share prices have hit some turbulence. Thanks to rising interest rates, volatility in the tech sector is picking up. And as the Nasdaq-100 – a popular gauge used to follow the US tech sector – is retreating from its all-time pandemic-induced highs, investors are wondering how to profit from or protect against this influential sector. Nasdaq-100 up days and down days year-to-date Source: ETF Securities, (Dates: 1 Jan - 24 March 2021) Short and long Nasdaq 100 funds issued by ETF Securities offer one solution. In this article, we look at how they work and the benefits and risks they offer. What do short and long funds do? Long and short funds magnify the ups and downs of the Nasdaq-100. They are kind of like mirrors and magnifying glasses. ETFS Ultra Short Nasdaq 100 Hedge Fund (SNAS) ETFS Ultra Long Nasdaq 100 Hedge Fund (LNAS) The short fund, known by its ASX ticker SNAS, is like a mirror. It moves in the opposite magnified direction to the share market, rising in value when the Nasdaq falls, and falling when it rises. In this way, SNAS, like short selling, can provide a way to profit from or hedge against a falling share market. Performance of LNAS and SNAS since inception Source: Bloomberg, 25 March 2021 The long fund, or LNAS, is the magnifying glass. It follows the Nasdaq up and down – but to a magnified degree. In this way, LNAS gives investors a tool for expressing strong views on the movements of technology stocks. The graphs above and below illustrate what the results can look like. The graph above shows the performance of both funds since inception. As the Nasdaq 100 has strongly rallied the past year, LNAS, the long fund, has outperformed. The short fund by contrast has strongly underperformed over the same period. SNAS performed strongly when the Nasdaq fell Source: Bloomberg, 25 March 2021 However, over shorter periods the results can look very different, as the graphs above and below indicate. In times when the Nasdaq 100 falls, SNAS performs strongly. The first fortnight of September 2020 was one such period. By contrast, in periods where the Nasdaq falls, LNAS falls further. Late-February early-March this year was one such period. LNAS falls more than the Nasdaq during dips Source: Bloomberg, 25 March 2021 These funds have advantages over derivatives – like options and CFDs – in that they are more transparent and easier to trade. They are also potentially safer, as we discuss below. How do they work? Leveraged long and short funds use Nasdaq 100 index futures to achieve their aims. SNAS sells Nasdaq index futures. Whereas LNAS buys them. To magnify the ups and downs, these futures are traded “on margin”, by our trading desk. Our trading professionals monitor the exposure to the Nasdaq 100 to keep gearing within a set band of 200% to 275% of the fund’s net asset value. When gearing becomes too low, they increase the exposure to bring it back up. When gearing becomes too high, they reduce exposure to bring it back down. This means the actual degree of gearing varies day to day—but is always actively managed. The level of gearing can be viewed on our website every day. Crucially, all gearing is managed within the funds. This means that investors never face margin calls. It also means SNAS and LNAS can never cause investors to lose more money than they put in. This makes LNAS and SNAS different from – and potentially safer than – outright short selling and derivatives trading, where investors can face margin calls and losses of potentially more than their original investment. How are the prices determined? As the funds use futures, their prices follow the futures market. It is important to note that futures markets can move in different directions to the share market—especially for Australian investors. This tends to occur for two major reasons: time zone differences between Australia and the US; and the more flexible trading hours that the futures market allows. Unlike shares, futures are traded almost 24 hours a day six days a week. This can mean, for example, that even when the Nasdaq-100 index falls throughout the Chicago trading day, the Nasdaq-100 index futures held in our funds rise throughout the Sydney trading day. This could occur, for instance, because traders believe that the Nasdaq 100 will rise the following morning in Chicago. What are the risks? It is important that investors understand that LNAS and SNAS are not like index-tracking exchange traded funds (ETFs). Instead, they are actively managed hedge funds, and come with a higher degree of risk than ETFs. As leveraged short and long funds magnify both the profits and losses investors experience, they are only appropriate for short term trading and any holdings should be actively monitored. They should not be used as buy and hold investments.