October Market Commentary
October started the fourth quarter off on a sour note, even with some positive economic surprises intra-month. Both the Dow Jones Industrial Average (DJIA) and the
S&P 500 finished down for the month, -2.54% and -1.83% respectively. The University of Michigan/Thomson Reuters Consumer Sentiment reading rose to 82.6 in
October from 78.3 in September, the highest reading since September of 2007, showing Americans are feeling better than they have felt in five years about their finances.
Still, the data showed many remained worried about the economy in general. Unemployment, which exceeded 8% for 43 consecutive months, ticked below 8% for the
first time since 2009, sending a signal that the recovery, although slow, is taking form.
The Federal Reserve vowed to continue their policies, maintaining a $40 billion monthly program buying mortgage-backed securities, in an effort to spur the economy
which is “growing modestly.” The Fed noted that business spending has slowed down, as the outlook for capital spending as measured by the monthly Philadelphia and
New York Fed surveys has fallen to levels only seen in or just prior to recessions. Companies look to be holding back investments until after the November elections to
better gauge how the U.S. Congress will deal with trying to avert the pending “fiscal cliff,” consisting of both mandatory spending cuts and tax increases.
Headwinds continue to persist outside the US, and these problems have global economic ramifications. Tensions in the Middle East have flared; fighting in Syria and
escalating rhetoric from Israel and Iran threaten neighbor states which provide almost a third of the world’s oil. In Asia, we have seen mounting tensions between China
and Japan over disputed territorial islands, threatening the balance between the regions two superpowers. Additionally, China is faced with balancing a once a decade
transitioning of party leadership, coming in early November, as well as a broad based economic slowdown. Europe continues to experience fits and starts, but seems
committed to working towards a solution for the broad issues that face the region.
October QuantShares Commentary
October was a strong month for the QuantShares family of Funds; all four of the funds finished the month positive. Value Strategies continue to string together positive
months of performance after spending much of 2012 out of favor. Valuation has begun to matter again, as evidenced by the QuantShares Market Neutral Value Fund
(CHEP) finishing October up 2.86%%, and 4.12% over the past 3 months. Similar to Value Strategies, Small Cap Strategies have regained footing in 2012. The Small
Cap premium has re-appeared as evidenced by the QuantShares Market Neutral Size Fund (SIZ) finishing the month up 0.20%, and up 0.66% for the last three months.
Momentum Strategies rebounded in October to finish slightly in the green, as QuantShares Market Neutral Momentum Fund (MOM) was up 0.35% for the month.
Momentum Strategies continue to be some of the top performers in 2012, as evidenced by MOM up 6.62% YTD. The QuantShares Market Neutral Anti-Beta Fund
(BTAL), continued to show strength in down markets, and finished the month up 0.43%.
Increasing uncertainty surrounding the “fiscal cliff,” global tensions, and an economic slowdown may provide a backdrop for increased volatility as we move further into
Q4. QuantShares Market Neutral Anti-Beta Fund (BTAL) is a strategy that can be used to hedge portfolios in a time of heightened market uncertainty, without
introducing sector biases. BTAL has a negative correlation (0.85) to the S&P 500 since its inception (9/13/2012). A recent example of outperformance in a down market
was in Q2 of 2012, when the S&P 500 finished the quarter down -3.29%, BTAL finished positive, up 11.70% for the quarter.
Performance as of 10/31/2012
Absolute Return ETFs
Month-End as of 10/31/2012 NAV
Month-End as of 10/31/2012
Market Price (MP)
1
3
1
Since
Month
Month
Year
Inception*
2.82%
4.08%
-0.80%
1.32%
0.51%
-3.60%
3.70%
3.82%
Quarter End as of 09/30/2012
Since Inception*
Annualized
NAV
MP
Gross**
Volatility
/ Net
7.40%
-1.16%
-1.28%
4.80/1.49
9.90%
4.00%
3.87%
5.40/1.49
1
Month
2.86%
0.35%
3
Month
4.12%
-3.42%
1
Year
-1.75%
3.66%
Since
Inception*
1.47%
3.78%
Size (SIZ)
0.20%
0.66%
-1.64%
-0.88%
0.08%
0.45%
-1.76%
-1.09%
7.72%
-1.21%
-1.33%
5.26/1.49
HFRI: Fund Weighted Composite Index
Russell 1000 Index***
3 Month T-Bill***
-0.49%
-1.83%
0.01%
1.67%
3.13%
0.02%
2.48%
14.80%
0.04%
NA
23.66%
0.04%
-0.49%
-1.83%
0.01%
1.67%
3.13%
0.02%
2.48%
14.80%
0.04%
NA
23.66%
0.04%
18.42%
-
-
-
-
Value (CHEP)
Momentum (MOM)
Hedging ETF
Month-End as of 10/31/2012 NAV
Anti-Beta (BTAL)
HFRI: Fund Weighted Composite Index
1
Month
0.43%
-0.49%
3
Month
-3.74%
1.67%
1
Year
3.64%
2.48%
Since
Inception*
-5.03%
NA
Russell 1000 Index***
3 Month T-Bill***
-1.83%
0.01%
3.13%
0.02%
14.80%
0.04%
23.66%
0.04%
Month-End as of 10/31/2012
Market Price
1
3
1
Since
Month
Month
Year
Inception*
-3.30%
-7.36%
0.18%
-8.26%
-0.49%
1.67%
2.48%
NA
-1.83%
0.01%
3.13%
0.02%
14.80%
0.04%
23.66%
0.04%
Quarter End as of 09/30/2012
Since Inception*
Annualized
NAV
MP
Gross**
Volatility
/ Net
17.67%
-6.10%
-6.22%
4.74/0.99
18.42%
-
-
-
-
*= Inception 9/7/11 for (MOM, SIZ); Inception 9/13/11 for (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. FFCM has contractually agreed (i) to waive its management fees and reimburse expenses until October 31, 2013 to the extent necessary to prevent the Fund’s net
operating expenses from exceeding 1.49% and (ii) to voluntarily waive its management fees and reimburse expenses for BTAL until further notice to the extent necessary to
prevent such expenses from exceeding 0.99%.
Company Overview:
QuantShares designs and manages Market Neutral ETFs to provide exposure to well-known equity factors such as Momentum, Value, 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 Momentum tend to be more strategic in nature and provide strong risk-adjusted returns; Anti-Beta tends to be 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.