WeatherStorm Capital, an alternative asset management company offering “all-weather” investment solutions, has launched the WeatherStorm Forensic Accounting Long-Short ETF on the Nasdaq (FLAG).
The fund seeks to enhance investors’ US large cap exposures by offering a long-short portfolio with full participation in the US 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 standardised, managers have wide latitude in interpretation. Some managers, highly incentivised 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 Fund seeks to distinguish between such companies to the benefit of investors.
The importance of forensic accounting was highlighted recently in an Associated Press study, which uncovered the widespread divergence between adjusted profits and bottom line earnings figures among the top 500 US companies, with 1 in 5 companies reporting adjusted profits more than 50% higher than net income. “These divergences, among others, can highlight aggressive accounting and a higher likelihood of disappointments in future earnings,” explains John Del Vecchio (pictured), original designer of the original FLAG index and co-author of What’s Behind the Numbers – a book on exposing financial chicanery, “the longer the rally, the bigger the downside because of all the smoke and mirrors.”
Del Vecchio has built a career upon detecting such disparities. It is John Del Vecchio’s deep forensic accounting insights that form the basis for the Forensic Accounting Long-Short Index which the FLAG ETF tracks. The new long-short index harnesses the analytical intellect of the original index, but enhances the potential for outperformance from the approach.
Andrew Alden, WeatherStorm’s Head of Quantitative Research, shares his enthusiasm for the new offering. “We are excited to offer investors an efficient and transparent way to utilise forensic accounting in their US large cap investing.” Investors will be able to utilise the fund as a core strategic tool while harnessing factors with enhanced risk adjusted returns potential.
“We view forensic accounting as a way to measure corporate honesty. The method and construction of this portfolio really gets behind the numbers and is reflective of a company’s leadership and governance,” explains Nicholas Stonestreet, CEO of Vident Financial.
The Forensic Accounting Long-Short ETF will be sub-advised by Vident Investment Advisory (VIA). VIA is the trading sub-advisor to Vident’s international and domestic equities and domestic bond ETFs, Robo-Stox Global Robotics & Automation ETF (ROBO), YieldShares High Income ETF (YYY), Janus Equal Risk Weighted Large Cap ETF (ERW) and the Hull Tactical US ETF, totalling approximately $2 billion in assets under management (AUM).