What's under the hood of VanEck's new long/short ETF - ALFA?

Many new products are being launched in the ETF space these days, and with no disrespect to the issuers, I’m happy to let most of them pass by. They simply aren’t for me.

Every now and then, however, there is one that captures my interest. Usually, it is because the issuer is doing something I haven’t seen before or putting a new twist on a strategy. In this case, it’s the VanEck Australian Long Short Complex ETF (ASX: ALFA).

Aside from having a fun ticker, ALFA lays claim to being “an actively managed, high conviction, systematic long/short Australian equity strategy that aims to outperform the S&P/ASX 200 Accumulation Index over the medium to long term after fees and other costs”.

That, of course, is just the marketing speak. I am more interested in understanding what’s under the hood, just how ‘active’ the strategy is and in what form, and - most critically - how it compares to other long/short strategies, of which there are some very fine examples in the Australian market.

Fortunately, I was able to tee up a conversation with VanEck’s Cameron McCormack to discuss the new offering. And whilst the conversation was product heavy given it’s a new launch, hopefully it adds some insights – particularly when comparing ALFA to traditional long/short funds.  

A high-conviction, style-agnostic approach

According to McCormack, the primary goal of launching ALFA is to provide investors with exposure to Australian equities while utilising a long-short approach.

Unlike many traditional funds that adhere to a specific investment style, McCormack points out that ALFA is designed to be "a high conviction, style-agnostic strategy," meaning it does not favour growth, value, or other predefined styles but instead relies on data-driven insights.

“Our approach really draws on the systematic alpha methodology to deliver, hopefully, outperformance relative to the ASX over the medium to long term,” McCormack explained.

Differentiation from traditional long-short funds

One of the key distinguishing factors of ALFA is its reliance on a systematic, quantitative investment framework rather than traditional discretionary management, which relies far more on fundamental analysis and portfolio managers’ judgement.

To be fair, this does appear to be a unique approach in the Australian market. Whilst many funds utilise a data-driven approach, I am not aware of any other long/short Australian equity funds that use such a methodology.

McCormack adds that existing funds in the space often have built-in style biases, such as a preference for quality or value stocks. ALFA, in contrast, aims to strip away these biases by leveraging “a highly sophisticated quantitative platform”.

“This platform draws on tens of thousands of data points to identify strategies that signal the highest potential for outperformance and underperformance,” McCormack noted.

“The key premise here is that we’re trying to eliminate the biases typically associated with active management and instead focus on technological advancements”.

Harnessing data for an investment edge

The comments above from McCormack, around leaning on data and technology, highlight where the rubber will meet the road for ALFA.

Any system that relies on data will only be as good as the data that goes into it, and the processing horsepower that drives it. 

VanEck had been exploring ways to bring this strategy to the market for many years. However, McCormack noted that the launch of ALFA was only made possible by recent breakthroughs in computing power.

“It’s only in the past two to three years that technological advancements have enabled us to bring this opportunity to market", said McCormack. 

A crucial part of ALFA’s strategy is its ability to process an enormous volume of data – tens of thousands of data points - to make informed investment decisions. McCormack broke this down into three key areas:

1. Quantitative strategies – Evaluating approximately 3,000 financial and industry-specific signals to identify investment opportunities. For example, changes in retailer inventory levels can provide insights into demand trends before earnings reports.
2. Technical and pair trading signals – Examining price trends and stock correlations to detect momentum-based investment opportunities.
3. Macroeconomic indicators – Analysing inflation rates, GDP growth, and other economic factors to assess market regimes and adjust portfolio positioning accordingly.

By combining these data-driven insights, ALFA aims to remain adaptive to market conditions. 

“The premise is that we’re trying to be agile in responding to macroeconomic shifts”, McCormack said.

This ability to adapt to different conditions is potentially another way ALFA will depart from traditional long/short funds, many of which aim to capture most but not all of the upside when markets are rallying, whilst outperforming significantly when markets fall to generate most of their alpha.

It remains to be seen how effective the strategy can be in changing market conditions, and whilst cautious not to overstate expectations, McCormack shared that extensive backtesting had been conducted prior to launch, potential to deliver excess returns in both rising and falling markets.

The role of human judgment in a data-driven strategy

Despite being highly systematic, ALFA does incorporate a human element but only in a limited capacity.

The investment process begins with filtering the investable universe down to the largest 240 stocks based on market cap and liquidity. The quantitative platform then analyses these stocks, generating a shortlist of potential long and short positions.

“The human element comes in at the final stage to ensure portfolio integrity,” McCormack explained.

“It’s more of a verification check rather than an active stock-picking role. We apply risk management and qualitative overlays to ensure we don’t end up with a portfolio that is all over the shop.”

Additionally, the team retains some discretion to adjust positions based on market conditions.

“If there is a systemic crisis unfolding, we have the discretion to increase the cash position,” McCormack notes, before adding, “But our net market target exposure is 100%”.

The nuts and bolts

ALFA follows a 130/30 structure, meaning it can have 130% exposure to long positions and 30% to short positions, resulting in a net market exposure of 100%.

The portfolio can hold up to 50 long positions, and up to 25 short positions.

“These limits are aligned with the broader market and are part of ensuring our strategy remains balanced,” McCormack explained.

“We also apply sub-sector capping to maintain diversification while reinforcing our high-conviction approach”.

ALFA also stands out in terms of cost. With a management fee of 39 basis points, it is significantly cheaper than other long/short funds where you are paying for the skill of a portfolio manager.

“The management fee is roughly a third of what you’d see with a typical active manager”, McCormack pointed out, and “There is a performance fee of 20% above the ASX 200 benchmark, which is consistent with our peers.”

The final word

Generally speaking, I am a fan of long/short strategies. They are hard to implement, as you need to focus on both sides of the market, but when done well, they can be incredibly effective.

ALFA brings a new dimension to long/short opportunities in Australia with a strategy that is as close to being purely data-driven as current technology will allow. And as McCormack points out, the launch is a natural extension of VanEck’s track record.

“We have a history of bringing innovative ETF solutions to Australia, including being the first to introduce smart beta ETFs. This is the next step in that evolution,” McCormack said.

Will it be a success? Unfortunately, that cannot be answered right now. The proof will only be found in the pudding. 

That said, the timing appears sound, with ALFA’s launch aligning with both the evolving capabilities of quantitative investing and shifting investor preferences – making it a compelling addition to the Australian investment landscape.