June Market Commentary
Equity markets staged a late quarter rally in June in an effort to stave off what was shaping up to be an otherwise abysmal second quarter. Both the DJIA and S&P 500
finished the month in markedly higher territory, up 3.93% and 3.96%, respectively. Economic signals on the home front continued to disappoint. The Institute for Supply
Management – Purchasing Manager’s Index fell in June to 49.7 from 53.5 in May, indicating a contraction in the manufacturing sector for the first time since July 2009 (a
reading above 50 indicates expansion, while a number below 50 means contraction). Although manufacturing contracted, the June PMI indicates growth for the 37th
consecutive month in the overall economy, albeit at a slower pace as we continue to move through 2012. The monthly nonfarm payroll data for June came in below
consensus, 80,000 vs. 100,000, and the unemployment rate remained at 8.2%. Federal Reserve Chairman Ben Bernanke commented that “the economy is failing to get a
boost from a more typical real-estate recovery,” even though we are experiencing record-low borrowing costs, and affordable home values. The Fed also signaled a
continuation of so-called Operation Twist, which was set to expire at month end, will now run thru the duration of 2012 and was expanded by $267 billion. The Fed
projections have damped expectations of Gross Domestic Product (GDP) growth in 2012 as they have adjusted their April forecasts from 2.4%-2.9% down to 1.9%-2.4%.
They also re-affirmed their stance on their interest rate outlook and the desire to keep rates “exceptionally low” at least through late 2014, and said they are “prepared to
take further action as appropriate.”
Referendum votes continued to sweep Europe, casting ever darker shadows over the European Union and the sustainability of its member nations. Greek election results
diffused talks of an imminent departure from the Euro, and Euro zone finance ministers reiterated their “commitment to assist Greece.” Funding pressures continue to
plague both Spain and Italy. Germany’s hard line stance against the southern economies of Europe appeared to have softened as Chancellor Merkel was forced to make
concessions as both Italian Prime Minister Mario Monti and his Spanish counterpart Mariano Rajoy were able to secure easier access to the permanent euro-zone bailout
fund, the European Stability Mechanism (ESM). This allows both countries to receive aid without having to agree to tough additional austerity measures and oversight,
which had been the lynchpin for aid from both the European Central Bank and the International Monetary Fund.
June QuantShares Commentary
Low beta names showed continued strength in June, as evidenced by QuantShares Market Neutral Anti-Beta Fund (BTAL) finishing the month up 0.68%. This was a
continuation of a trend built throughout the quarter, where low-beta names outpaced their high beta peers, in a complete reversal of the first quarter. QuantShares BTAL
was able to take advantage of this market reversal and post outperformance of the broad equity markets by finishing Q2 up 11.70%. QuantShares BTAL provides a
diversified hedge that allows investors to target low-beta names without taking on any additional sector bias (QuantShares BTAL is long the lowest beta names in each
sector and short highest beta names in each sector).
Momentum strategies lost some steam in June, as QuantShares Market Neutral Momentum Fund (MOM) drifted lower to post a loss of 0.94% for the month. Overall,
momentum strategies had a strong second quarter as we saw them outpace the broad market performance as evidenced by the QuantShares MOM which was up 7.37%
over the last three months. QuantShares MOM currently favors lower volatility/higher growth stocks.
Value strategies which have underperformed for the majority of 2012, bounced back in June posting their first positive month since February, QuantShares Market
Neutral Value Fund (CHEP) finished up 1.01% for the month.
A continued risk averse environment tends to favor quality stocks. The QuantShares Market Neutral Quality Fund (QLT) (long high quality stocks and short low quality
stocks, based on Return on Equity and debt-to-equity ratios) has a negative correlation (-0.80) to the equity markets, which may provide a nice hedge if the market
continues to swoon as we move further into summer.
Performance as of 06/30/2012
Strategic ETFs
Month-End as of 06/30/2012 NAV
1-Mo
3-Mo
Value (CHEP)
Quality (QLT)
1.01%
-1.51%
Size (SIZ)
HFRI: Fund Weighted Composite Index
Russell 1000 Index***
3 Month T-Bill***
Tactical ETFs
Month-End as of 06/30/2012
Market Price (MP)
1-Mo
3-Mo
-4.00%
-1.97%
Since
Inception*
-1.70%
-5.62%
0.92%
-1.51%
0.20%
-0.76%
0.28%
0.05%
3.83%
0.00%
-2.88%
-3.12%
0.02%
NA
18.50%
0.03%
-3.57%
-2.01%
Since
Inception*
-1.70%
-5.62%
Annualized
Volatility
7.34%
5.92%
-1.70%
-5.62%
-1.70%
-5.62%
2.50/.99
2.50/.99
0.24%
-0.84%
0.28%
8.04%
0.28%
0.28%
2.97/.99
0.05%
3.83%
0.00%
-2.88%
-3.12%
0.02%
NA
18.50%
0.03%
20.07%
-
-
-
-
Month-End as of 06/30/2012 NAV
1-Mo
3-Mo
Anti-Beta (BTAL)
Momentum (MOM)
High Beta (BTAH)
Anti-Momentum (NOMO)
0.68%
-0.94%
-1.05%
0.95%
HFRI: Fund Weighted Composite Index
Russell 1000 Index***
3 Month T-Bill***
Quarter End as of
06/30/2012
Since Inception*
NAV
MP
Month-End as of 06/30/2012
Market Price
1-Mo
3-Mo
11.70%
7.37%
-13.45%
-7.83%
Since
Inception*
-3.21%
4.04%
-5.11%
-8.47%
0.98%
-0.66%
-0.88%
0.86%
0.05%
3.83%
-2.88%
-3.12%
NA
18.50%
0.00%
0.02%
0.03%
Quarter End
as of 06/30/2012
Since Inception*
NAV
MP
Gross**/Net
12.43%
7.80%
-12.39%
-7.91%
Since
Inception*
-3.13%
4.28%
-4.87%
-8.52%
Annualized
Volatility
18.64%
9.05%
18.16%
9.42%
Gross**/Net
-3.21%
4.04%
5.11%
-8.47%
-3.13%
4.28%
-4.87%
-8.52%
1.92/.99
2.79/.99
3.27/.99
2.07/.99
0.05%
3.83%
-2.88%
-3.12%
NA
18.50%
20.07%
-
-
-
0.00%
0.02%
0.03%
-
-
-
-
*= Inception 9/7/11 for (MOM, NOMO, QLT, SIZ); Inception 9/13/11 for (BTAH, BTAL, CHEP)
**= Gross expense ratio includes dividend expense on short positions. Dividend income earned on long positions and interest earned on cash collateral are not reflected in the ratio. This income serves to offset the dividend
expense on short positions.
***= Performance starting 9/7/2011
Performance data quoted represents past performance and is no guarantee of future results. Current performance may be lower or higher than the performance data quoted.
Investment and principal value fluctuate so that an investor’s shares, when redeemed, may be worth more or less than the original cost. Returns less than one year are not
annualized. Since the Funds are new, the Operating expenses are based on first year anticipated Assets Under Management growth. FFCM has contractually agreed to waive
fees and expenses to limit net expenses from exceeding 0.99% until August 31, 2012.
Company Overview:
QuantShares designs and manages Market Neutral ETFs to provide exposure to well-known equity factors such as Momentum, Value, Quality, Beta and Size.
QuantShares Market Neutral ETFs are the first ETFs that have the capability to short physical stocks (as opposed to derivatives) that passively track indexes. Our
ETFs offer investors a diversifying asset that is both highly liquid and fully transparent. The ETFs are designed to generate spread returns, diversify risk and
reduce volatility. Value, Size and Quality tend to be more strategic in nature and provide strong risk-adjusted returns; Beta and Momentum are more tactical and
allows investors to hedge or express short term investment convictions. QuantShares Market Neutral ETFs provide a liquid alternative to help dampen volatility
and enhance the risk return profile of an investment portfolio.
Disclosures:
Before investing you should carefully consider the Fund’s investment objectives, risks, charges, and expenses. This and other information is in the prospectus, a
copy of which can be obtained by visiting the Fund’s website at www.quant-shares.com. Please read the prospectus carefully before you invest. Foreside Fund
Service, LLC, Distributor.
Shares are not individually redeemable and can be redeemed only in Creation Units. The market price of shares can be at, below or above the NAV. Market Price
returns are based upon the midpoint of the bid/ask spread at 4:00PM Eastern time (when NAV is normally determined), and do not represent the returns you would
receive if you traded shares at other times. Fund returns assume that dividends and capital gains distributions have been reinvested in the Fund at NAV. Some
performance results reflect expense subsidies and waivers in effect during certain periods. Absent these waivers, results would have been less favorable.
Risks: There is no guarantee that the funds will reach their objective. An investment in the Funds is subject to risk including the possible loss of principal amount
invested. See prospectus for specific risks regarding each Fund. There is a risk that during a “bull” market, when most equity securities and long only ETFs are
increasing in value, the Funds’ short positions will likely cause the Fund to underperform the overall U.S. equity market and such ETFs. The Funds may not be
suitable for all investors. Short selling could cause unlimited losses, derivatives could result in losses beyond the amount invested, and the value of an investment
in the Fund may fall sharply.
Beta is a measure of an asset’s sensitivity to an underlying index. Long is purchasing a stock with the expectation that it is going to rise in value. Short is selling
stock with the expectation of profiting by buying it back later at a lower price. HFRI Fund Weighted Composite Index is a global, equal-weighted index of over
2,000 single-manager funds that report to Hedge Fund Research Database. Negative correlation is a relationship between two variables in which one variable
increases as the other decreases. Russell 1000 Index measures the performance of approximately 1000 of the largest companies in the U.S. equity market. DJIA
– Dow Jones Industrial Average is a price weighted average of 30 significant stocks traded on the NYSE and NASDAQ. S&P 500 is an index of 500 large cap
common stocks actively traded on the NYSE and NASDAQ. One cannot invest directly in an index.