Tech

Quant Fund Outshines Peers with 20% Gain via Nasdaq Bet

HCM Tactical Growth Fund achieves 20% annualized gain, outperforming 96% of peers with $1.6 billion in assets.

By Max Weldon

7/10, 12:56 EDT
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Key Takeaway

  • Vance Howard's HCM Tactical Growth Fund, leveraging Nasdaq 100 ETFs, outperformed 96% of peers with a 20% annualized gain over five years.
  • Despite success, Howard's funds faced significant volatility in 2022, with the HCM Tactical Growth Fund dropping nearly 40%.
  • Leveraged ETFs have seen $8.4 billion inflows this year but carry risks; understanding leverage mechanisms is crucial for investors.

Unconventional Investment Strategy

Vance Howard, a 60-year-old wealth adviser based just outside Atlanta, has developed a unique approach to investing that aims to "remove the emotion from the investing process." His method involves leveraging exchange-traded funds (ETFs) to amplify the daily returns of the Nasdaq 100, combined with quantitative tactics to time market entries and exits. This strategy has proven effective, with Howard's HCM Tactical Growth Fund outperforming 96% of its peers over the last five years, achieving an annualized gain of 20%.

Established a decade ago, the $1.6 billion fund allocates a third of its assets to double- and triple-leveraged ETFs, products typically favored by day traders, while the remainder is invested in various megacap companies. Howard's approach has led to significant growth in assets under management, which have increased from $350 million to $6 billion over the past decade. "I don’t think these are high risk. My personal account is our largest client," Howard stated, emphasizing his confidence in the strategy.

Another fund managed by Howard, the HCM Dividend Sector Plus Fund, also employs leveraged ETFs, with nearly 40% of its portfolio in double-leveraged Nasdaq 100 and triple-leveraged S&P 500 products. This fund has similarly outperformed the S&P 500 total return index over the past five years. However, the strategy is not without risks. David Cohne of Bloomberg Intelligence cautioned, "Indirect exposure to leveraged ETFs, especially triple leveraged ETFs, could expose retail mutual fund investors to large potential losses."

Leveraged ETFs and Market Timing

Howard's funds utilize a proprietary "mathematically driven process" to time the market based on price trends and other inputs. This approach allowed his funds to hold around two-thirds of their assets in cash during the pandemic, a stark contrast to most Wall Street professionals who typically remain fully invested. "We don’t have a set time on when we rebalance," Howard explained. "We are very active. We can pull out in 10 minutes. We are out in 10 minutes and we will be in cash."

Despite the overall success, Howard's funds have experienced significant volatility. In 2022, the HCM Tactical Growth Fund dropped nearly 40%, more than double the S&P 500's nearly 18% decline. The HCM Dividend Sector Plus Fund also fell around 22%. Leveraged ETFs, which use derivatives to boost returns or pay out the opposite of an index's return, have gained popularity, particularly among risk-tolerant retail investors. These funds have seen over $8.4 billion in inflows this year, on track to surpass last year's $10.1 billion.

Amrita Nandakumar, president at Vident Asset Management, noted, "They generally are not designed for a long-term buy-and-hold strategy. Where we see people have issues is when they lack an understanding of the fund’s leverage mechanism, and then they are surprised by unpredictable return patterns and quickly compounding losses."

Hedge Fund Performance

Tech-focused equity hedge funds Whale Rock Capital Management and Light Street Capital Management have outperformed the market and some larger rivals in the first half of the year. Glen Kacher’s Light Street climbed 54.6%, while Alex Sacerdote’s Whale Rock gained 31.7%. Both funds benefited from large stakes in top-performing S&P 500 companies like Nvidia, Amazon, and Meta Platforms. Despite these strong returns, the firms have not yet recouped losses from 2021 and 2022.

Other stock managers, including Tiger Cubs Viking Global Investors and Coatue Management, underperformed the S&P 500's total return of 15.3% in the first half. This underperformance is partly due to their lack of significant holdings in Nvidia, which surged almost 150% in the first six months of the year. Dan Sundheim’s D1 Capital Partners saw a 20.1% increase in its public equity portfolio, though this does not include private company investments, which accounted for about 60% of the firm's $19 billion in assets at the end of last year.

Street Views

  • David Cohne, Bloomberg Intelligence (Cautiously Optimistic on leveraged ETFs):

    "Indirect exposure to leveraged ETFs, especially triple leveraged ETFs, could expose retail mutual fund investors to large potential losses. Doing so could be playing with fire."

  • Amrita Nandakumar, Vident Asset Management (Neutral on long-term use of leveraged ETFs):

    "They generally are not designed for a long-term buy-and-hold strategy. Where we see people have issues is when they lack an understanding of the fund’s leverage mechanism, and then they are surprised by unpredictable return patterns and quickly compounding losses."

Management Quotes

  • Vance Howard, Founder of Howard Capital Management:

    "I don’t think these are high risk. My personal account is our largest client... They don’t hire us to be average. If you want average, go buy an index."
    "We don’t have a set time on when we rebalance. We are very active. We can pull out in 10 minutes. We are out in 10 minutes and we will be in cash."
    "I am not trying to call the top or bottom of the market... I am just trying to miss 80% of the bad and capture 80% of the good."