November Market Commentary
November’s market and economic data could best be described as mixed. The Dow Jones Industrial Average (DJIA) finished the month lower down -0.54%, while the S&P 500
rallied into month-end to finish positive for the month, up 0.58%. The Institute for Supply Management (ISM) noted an unexpected contraction in manufacturing, falling to its
lowest level in three years. The index of national factory activity fell to 49.5; a reading below 50 indicates contraction, while a number above 50 means expansion. The Federal
Reserve’s Beige Book dated 11/28/2012 noted seven of twelve Fed districts reported “either slowing or outright contraction in manufacturing”. Risks continue to persist overseas
for US goods as the Euro-area growth is at a standstill, and China’s growth has cooled in recent quarters.
The Commerce Department reported Gross Domestic Product (GDP) expanded at a 2.7% annual rate, but revised lower both consumer and business spending, noting the
continuing underlying weakness in the recovery. Consumer Spending, roughly 70% of U.S. economic activity, posted the largest decline since September of 2009, suggesting
slower fourth quarter growth. In the face of what looks to be divergent data surrounding the U.S. Consumer, The Consumer Conference Board noted the highest consumer
confidence since February 2008, and The National Association of Realtors noted pending homes sales are at their highest levels since March 2007, buoyed by record-low
borrowing costs and a resumption of consumer confidence.
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.” Chairman Bernanke continued to voice concerns over the increasing political rhetoric surrounding the “fiscal cliff” negotiations, and urged politicians to not
kick the can down the road. “Uncertainty about how the fiscal cliff, the raising of the debt limit, and the longer-term budget situation will be addressed appears to be affecting
private spending and investment decisions and may be contributing to an increased sense of caution in the financial markets” he said. Additionally he repeated that monetary
policy is “by no means a panacea” and all three branches of government must come together to find an agreement to remove the uncertainty and sustain the recovery.
Headwinds continue to persist outside the US, and these problems have global economic ramifications. Tensions in the Middle East have flared; fighting continues in Syria and
escalating rhetoric has boiled over into conflicts between Israel and Hamas. Iran continues to threaten neighbor states which provide almost a third of the world’s oil. China
recently completed its once in a decade transitioning of party leadership in early November. In the face of manufacturing contraction in the Euro-area, data showed China’s
manufacturing gauge is at a seven month high and gaining momentum and Russia manufacturing expanded for the 14th consecutive month.
November QuantShares Commentary
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 November up 0.37%. CHEP has posted positive returns the last 4 months as we have seen more expensive names
sell off (CHEP is long the least expensive names within each sector, and short the most expensive names within each sector). Small Cap Strategies have bounced between
positive and negative performance for much of 2012. The Small Cap premium looks to have re-appeared as we have seen back to back positive returns as evidenced by the
QuantShares Market Neutral Size Fund (SIZ) finishing the month up 0.28%.
The QuantShares Market Neutral Momentum Fund (MOM) was down -0.20% for the month of November, but Momentum Strategies continue to be some of the top performers
in 2012, as evidenced by MOM up 6.41% YTD. The QuantShares Market Neutral Anti-Beta Fund (BTAL) was down for the month -1.30%, as the equity markets rallied for a
positive finish.
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 11/30/2012
Absolute Return ETFs
Month-End as of 11/30/2012 NAV
Month-End as of 11/30/2012
Market Price (MP)
1
3
1
Since
Month
Month
Year
Inception*
0.50%
3.34%
-0.70%
1.64%
-0.63%
-1.33%
4.46%
3.03%
Quarter End as of 09/30/2012
Since Inception*
Annualized
NAV
MP
Gross**
Volatility
/ Net
7.40%
-1.10%
-1.22%
4.80/1.49
9.68%
3.75%
3.63%
5.40/1.49
Value (CHEP)
Momentum (MOM)
1
Month
0.37%
-0.20%
3
Month
3.47%
-1.28%
1
Year
-1.12%
4.83%
Since
Inception*
1.68%
3.36%
Size (SIZ)
0.28%
-0.32%
-2.44%
-0.59%
0.33%
-0.49%
-1.83%
-0.75%
7.42%
-1.13%
-1.25%
5.26/1.49
HFRI: Equity Market Neutral Index
3 Month T-Bill***
0.64%
0.01%
1.29%
0.02%
3.48%
0.04%
NA
0.04%
0.64%
0.01%
1.29%
0.02%
3.48%
0.04%
NA
0.04%
-
-
-
-
Hedging ETF
Month-End as of 11/30/2012 NAV
Anti-Beta (BTAL)
S&P 500 Index***
1
Month
-1.30%
0.58%
3
Month
-1.29%
1.29%
1
Year
-0.08%
16.15%
Since
Inception*
-5.72%
19.75%
3 Month T-Bill***
0.01%
0.02%
0.04%
0.04%
Month-End as of 11/30/2012
Market Price
1
3
1
Since
Month
Month
Year
Inception*
-0.22%
-1.25%
-1.10%
-5.79%
0.58%
1.29%
16.15%
19.75%
0.01%
0.02%
0.04%
0.04%
Quarter End as of 09/30/2012
Since Inception*
Annualized
NAV
MP
Gross**
Volatility
/ Net
16.77%
-5.82%
-5.94%
4.74/0.99
18.00%
-
-
-
-
*= 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. Negative correlation is a relationship between two variables in which one variable
increases as the other decreases. HFRI EH: Equity Market Neutral Index incorporates equity market neutral strategies including both Factor-based and
Statistical Arbitrage/Trading Strategies. Equity Market Neutral Strategies typically maintain characteristic net equity market exposure no greater than 10% long or
short. 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.