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Ana Armstrong: our smartest beta trades...ever

Ana Armstrong: our smartest beta trades...ever

Ana Armstrong, managing partner at Armstrong Investment Managers, talks about her top exchange traded product (ETP) trades in the Diversified Dynamic Solution (DDS) fund.

Shorting US natural gas 

We added ETFS Short Natural Gas in October 2011, based on significant production growth due on new drilling technologies and shale gas production. There were also high roll costs because the natural gas curve was in steep contango. Also, new production may essentially become worthless because all storage could be filled by this summer. We closed our short in April this year, at a 250% profit. We will add the position again, if the natural gas price rises past $2.90/mcf (million cubic feet).

Selling gold in January

We sold ETFS Gold at a profit in January, after our analysis revealed that the correlation between gold and the S&P 500 went from zero around 10 years ago to 0.89 recently. So the correlation is very strong. The correlation has also gone up between gold and volatility as measured by the Vix, to 0.9. This is a signal that gold has become very speculative in the last couple of years, and also because of the global slowdown. So we shorted the gold ETC.

We were long gold at one point, with a position at 7%, and now we are 0%, having sold out in January.

Buying agricultural commodity ETC two years ago

Over the last two years, our agricultural ETC has returned 40%. There have been droughts in some areas and flooding in others, which has disrupted supply and boosted prices due to the crop shortages in certain commodities. This is a very successful trade we’ve held for a long time.

Long ETFS one-year forward crude ETF, short front month ETFS crude ETF

We have been long crude on the 12-month forward contract, and short the front month contract due to contango in the front of the curve and backwardation on longer dated contracts. We added the positions in May 2009 and continue to own it.

We are long the 12-month contracts because they are rolling into backwardation, and short the front month contracts because they roll into contango. Our long position is 33% and our short position is 7%. These trades have given us 26% return with no net market exposure.

Short volatility

We are short the TVIX – the VelocityShares Daily 2x VIX Short-Term exchange traded note (ETN). Volatility futures are in very steep contango, which has led to very high roll cost. This ETN often moves to a significant premium to NAV, and we often short it when this occurs. We first opened this position in March and the maximum holding period has been two-three days, when it moves to significant premium.

Long iShares S&P Global Water

This is the largest position in our DDS and DRR funds. We added it in January 2010 and continue to own it. Global water companies trade at significant discounts to the broad equity index. But they benefit from stable cashflows and higher than average long-term growth.

The UN says two billion people globally need more water than they have access to at present. But by 2050, it has estimated six billion people will need access to more clean water than they can gain access to. This ETF offers diverse exposure to companies in water treatment, distribution, measuring and cleansing.

Why have you chosen ETFs over active funds?

For these opportunities, ETFs are more efficient. We use beta to capture these alpha opportunities and if we want to add to a particular position, then it’s easy to put on using ETFs, in a clean, transparent way.

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