WeatherStorm Forensic Accounting Long-Short Index (FLAGLSX) Rebalance Review June 2017

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WeatherStorm - A Vident Group of Companies - an alternative asset management company, undergoes quarterly rebalance of their long-short index strategy.

WeatherStorm Forensic Accounting Long-Short Index (FLAGLSX) seeks to enhance investors’ U.S. large cap exposures by offering a long-short portfolio with full participation in the U.S. market beta while providing additional alpha potential through the careful and systematic selection and shorting of stocks based on forensic accounting analysis.

Forensic accounting is the process of critically dissecting companies’ financial statements with the goal of identifying the “red flags” of aggressive accounting and revenue recognition practices. While Generally Accepted Accounting Principles (GAAP) are standardized, managers have wide latitude in interpretation. Some managers, highly incentivized to produce stock performance, will use the accounting levers at their disposal to boost short-term results at the cost of future performance. The Forensic Accounting Long-Short Index seeks to distinguish between such companies to the benefit of investors.

Rebalance Goals:
The rules-driven objective quarterly reviews ensure the index continues to accurately reflect Vident and WeatherStorm’s principles-based methodology and form an essential component of the index management. The rebalance serves to update the portfolio to reflect changes in market opportunities and risks. Positions which have grown in size are reduced to decrease company concentration risks. Rebalance changes are also driven by forensic accounting assessments as each company’s latest financial statements are incorporated and assessed for risks.

Outcomes of Current Rebalance:
Turnover for this rebalance was 26%. While many factors – as detailed above – led to some portfolio trading, risk management objectives were the largest driver of turnover in this rebalance. Stocks which had grown in allocation due to strong performance were trimmed back, reducing concentration risk. Additionally, active sector risks were reduced and the strategy’s 130/30 balance was realigned. Finally, opportunities to improve the portfolio composition due to changes in company’s financials and valuations led to a modest but notable improvement in forensic accounting score of 2%.

Significant Deletions:
Whole Foods Market – On June 16, Amazon announced its intended acquisition of Whole Foods Market, sending the stock price soaring 27%. As pending acquisition targets are removed from the investment universe of the FLAGLSX index, the fund took profits and reallocated capital to other well run companies at attractive valuations.

Under Armour – Under Armour has been a long time short position in the portfolio. As the stock is now down 26% for the year the index methodology has closed out the position and reallocated to more attractive short positions.

About WeatherStorm Capital
WeatherStorm Capital is a subsidiary of Vident Financial that provides all-weather investment strategies that combine deep investment research with thoughtful systematic portfolio design and risk management. WeatherStorm provides alternative investment solutions that are broadly classified into two categories: investments across asset classes designed to deliver absolute returns, and single asset class solutions designed to deliver superior risk adjusted return over respective benchmarks.

A link to the full methodology can be found here

All changes from this review will be implemented at the close of business Friday, June 30, 2017 and take effect from the start of trading on Monday, July 3rd, 2017.

This press release is for informational purposes only, and is not an offer or recommendation to buy or sell or a solicitation of an offer to buy or sell any security or instrument or to participate in any particular trading strategy. Further, none of the information and material in this presentation is intended to constitute legal advice, tax advice, investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such. Additionally, nothing herein shall be deemed to constitute an offer or a solicitation of an offer to provide advisory services to any person in any jurisdiction where such offer or solicitation would be unlawful or otherwise prohibited. Historical data and analysis should not be taken as an indication or guarantee of any future performance, analysis, forecast or prediction. Investing involves risk. Principal loss is possible.

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Avery Beaty
Vident Financial
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