AdvisorShares

AdvisorShares Investments, Inc.

Company type	Subsidiary
Industry	Investment Management
Founded	2006
Founder	Noah Hamman
Headquarters	Bethesda, Maryland
Key people	Noah Hamman, CEO Dan Ahrens, Executive Vice President James Carl, Vice President of Business Development, National Sales Director Charles Robertson, Director of Marketing
Products	18 Exchange-Traded Funds (ETFs): U.S. and International Equity, Fixed Income and Alternatives
AUM	US$1,029.64 million
Number of employees	?
Parent	Fund.com
Website	(http://www.advisorshares.com)

AdvisorShares Investments is an exchange-traded fund (ETF) development platform, based in Bethesda, Maryland. AdvisorShares creates “actively managed” ETFs with investment managers. Investors are connected with appropriate diversified fund products while asset managers are assisted in building client assets under management. AdvisorShares is a subsidiary of Fund.com, which has a 60% ownership interest.

Actively Managed Exchange Traded Funds

Historically, exchange-traded funds are designed to track an index, like the S&P 500. They are passively managed: when the index makes a trade, the ETF makes the same trade without speculation. Operational efficiency, transparency, liquidity and tax efficiency are some of the appealing characteristics of ETFs.

AdvisorShares has exemptive relief from the Investment Company Act of 1940, which means they have permission to pair their ETFs with a fund manager.

Complete Listing of Funds

• AdvisorShares WCM/BNYMellon Focused Growth ADR ETF NYSE: AADR
• AdvisorShares Accuvest Global Opportunities ETF NYSE: ACCU
• AdvisorShares Accuvest Global Long Short ETF NYSE: AGLS
• AdvisorShares Pring Turner Business Cycle ETF NYSE: DBIZ
• AdvisorShares EquityPro ETF NYSE: EPRO
• AdvisorShares Madrona Global Bond ETF NYSE: FWDB
• AdvisorShares Madrona Domestic ETF NYSE: FWDD
• AdvisorShares Madrona International ETF NYSE: FWDI
• AdvisorShares Global Echo ETF NYSE: GIVE
• AdvisorShares Cambria Global Tactical ETF NYSE: GTAA
• AdvisorShares Ranger Equity Bear ETF NYSE: HDGE
• AdvisorShares Athena International Bear ETF NYSE: HDGI
• AdvisorShares Peritus High Yield ETF NYSE: HYLD
• AdvisorShares Meidell Tactical Advantage ETF NYSE: MATH
• AdvisorShares Newfleet Multi-Sector Income ETF NYSE: MINC
• AdvisorShares QAM Equity Hedge ETF NYSE: QEH
• AdvisorShares TrimTabs Float Shrink ETF NYSE: TTFS
• AdvisorShares STAR Global Buy-Write ETF NYSE: VEGA

Founding and Exemptive Relief

Background

Three former Rydex employees, Noah Hamman, Jacob Griffith and Joseph Barrato II founded Arrow Funds in February 2006. Less than 7 months after starting Arrow, in August 2006 Noah Hamman, while still acting as the CEO of Arrow Funds, established a separate company called AdvisorShares alledgedly without the knowledge of his two partners "and in violation to his fiduciary duty to Arrow [...] Hamman then systematically diverted to the benefit of himself and AdvisorShares opportunities, assets, and contracts that rightfully belonged to Arrow. [...]When Arrow began to learn of Hamman's competing activities and confronted him regarding those activities, Hamman engaged in further deceptive misconduct by affirmatively misrepresenting the nature and scope of his endeavors on behalf of AdvisorShares". Hamman's employment with Arrow was finally terminated on November 29 or 30th, 2007, after Arrow Management Committee discovered more information about the nature of Hamman's competing activities. On October 31, 2008 Fund.com purchased its 60% stake in AdvisorShares for an initial payment of $275,000.

Application for Exemptive Relief and Arbitration Proceedings

On November 7, 2008 Arrow commenced arbitration proceedings against Hamman and AdvisorShares for usurping Arrow's intellectual property including its business plan in establishing AdvisorShares. In January 2009 Arrow Funds requested a hearing with the SEC to challenge AdvisorShares' application for exemptive relief filed the previous month. Arrow and their counsel claimed that Hamman "To enable the Application to proceed, deliberately thwarted and delayed the selection of the Arbitration tribunal members." This request to block the application for exemptive relief was denied on July 20, 2009. "On March 1, 2010, Mr. Hamman, Arrow and the Members agreed to settle the Arbitration"

Hamman's Unsuccessful Petition for Dissolution of Arrow

On October 10, 2008, Noah Hamman petitioned (under §18-802 of the Deleware LLC Act) a Court in Delaware to dissolve Arrow Investment Advisors, LLC. Hamman claimed that Arrow's managers had mismanaged the company and could not achieve the goals set forth in the orginal business plan. He alleged that Arrow's managers had: 1) "exposed the Company to liability by violating the particular federal securities laws and regulations under which the Company is required to operate, and have failed to seek appropriate supervision from the broker-dealer for the Company’s specific obligations as a FINRA-licensed representative" 2) "operated the Company for their own financial benefit, and have spent Company funds for their own private use and enjoyment, while paying wages to various employees in an erratic and tardy fashion." 3)"failed to provide to all members an annual operating plan for 2008 as required by the LLC Agreement". On April 23, 2009, the judge in the case dismissed the Petition with prejudice (meaning that because of misconduct on the part of the claimant it can not be refiled), as Hamman failed to provide factual evidence to back his claims and "Hamman was required to press his fiduciary claims in binding arbitration under the Arrow LLC Agreement". "Hamman suggests that merely stating these allegations, virtually without any factual support, is enough to survive a motion to dismiss. [...]Here, the Petition is devoid of any facts supporting Hamman’s first two allegations, such as which of the myriad federal securities laws Arrow must comply with were violated or for what improper personal purposes Barrato and Griffith used Arrow funds and approximately when and how much of Arrow’s funds they misused." The judge even goes so far as to suggest revenge might have been one of the motivating factors for Hamman filing the petition: "And, although Hamman might be disappointed that he has been ousted from the management of a company he helped establish,"

The DENT Tactical ETF (NYSE symbol: DENT)

The Dent Tactical ETF commenced trading on the New York Stock Exchange on September 15, 2009 under the NYSE Ticker: DENT. The first product of AdvisorShares Investments, LLC, DENT was actively managed by HS Dent Investment Management, LLC, an independent economic research and forecasting company and publisher of The Dent Method.

HS Dent Investment Management is managed by financial author, Harry S. Dent Jr. "Dent, who penned the New York Times bestseller “The Roaring 2000s: Building the Wealth and Lifestyle You Desire,” predicted the Dow Jones Industrial Average to reach 35,000 more than a decade ago. Then, last year (2011), he called for Dow 3,800." Previously, HS Dent had raised and managed a $2.0 billion mutual fund, AIM Dent Demographic Trends, which was merged into another fund after it lost 80% of its assets.

As of July 2011, according to Morningstar, Inc., DENT had highest expense ratio among ETFs, 1.5% of assets. In fact, John Rekenthaler, Morningstar's vice president of research, said "If there was ever a fund set up to fail, this is it […]There are very few examples of funds that are high-turnover, tactical, market-timing and high-expense that do well, and Harry Dent's name isn't associated with one of those exceptions."

DENT closed in August 2012. Its last day of trading was August 8, 2012 and remaining investments were returned to shareholders on August 15, 2012.

The Mars Hill Global Relative Value ETF (NYSE symbol: GRV)

The Mars Hill Global Relative Value ETF commenced trading on the New York Stock Exchange on July 9, 2010 under the NYSE Ticker: GRV. The second product of AdvisorShares Investments, LLC, GRV was actively managed by Mars Hill Partners, LLC, an SEC-registered investment adviser based in Colorado Springs, Colorado, and an affiliate of private wealth manager Huntley Thatcher Ellsworth, Ltd.

GRV was the industry's first actively managed long/short ETF. Long/Short describes an investing strategy primarily used by hedge funds, that combines long positions in the most attractive country, sector and/or industry ETFs, with an equal dollar amount short in the least attractive country, sector and/or industry ETFs. The strategy strives to profit from the performance spread between its long and short positions. These relative value spreads are prevalent throughout both rising and falling market environments.

While GRV managed to raise $38 million a month after it launched, investors fled due to poor performance until the fund had only $3.2 million left. On December 1, 2011, Accuvest Global Advisors took over management of the fund and changed the name and ticker to AdvisorShares Accuvest Global Long Short ETF (AGLS). Morningstar, Inc. currently puts this fund in its Long/Short Equity category and gives it a one-star rating. This is the lowest rating given by Morningstar and it means that a fund is in the bottom 10% of its category in terms of risk-adjusted return. However, AGLS does have the distinction of being "the most expensive active fund...with a net expense ratio of 5.86 percent" according to Dennis Hudachek at IndexUniverse.

The WCM/BNY Mellon Focused Growth ADR ETF (NYSE symbol: AADR)

The WCM/BNY Mellon Focused Growth ADR ETF commenced trading on the New York Stock Exchange on July 21, 2010 under the NYSE Ticker: AADR. The third product of AdvisorShares Investments, LLC, AADR is actively managed by WCM Investment Management, a 100% employee-owned investment advisory firm based in Laguna Beach, California.

AADR is the industry's first actively managed international ETF, investing primarily in American Depositary Receipts(ADRs). BNY Mellon, the world's largest depositary for ADRs provides the primary benchmark to the ETF as well as expertise within the ADR industry to the AADR portfolio management team. The investment objective of AADR is long-term capital appreciation above international benchmarks such as the BNY Mellon Classic ADR Index and the MSCI EAFE Index. Later on May 31, 2011 WCM launched a mutual fund version of this strategy called the Focused International Growth Fund (WCMIX). While AADR has received a 4 star rating from Morningstar, WCMIX now has $458.7 million in AUM or 55 times the amount in AADR, according to Morningstar.

The TrimTabs Float Shrink ETF (NYSE symbol: TTFS)

AdvisorShares teamed up with TrimTabs Investment Research to launch the AdvisorShares TrimTabs Float Shrink ETF (TTFS) on October 4, 2011. "TTFS is sub-advised by TrimTabs Asset Management ("Portfolio Manager"), a subsidiary of TrimTabs Investment Research (TrimTabs). The Fund seeks to achieve this objective by investing in stocks with liquidity and fundamental characteristics that are historically associated with superior long-term performance. Stock selection for TTFS is based on extensive historical research from TrimTabs, the leading independent institutional research firm focusing on stock prices as a function of supply and demand rather than value." Charles Biderman is the CEO of TrimTabs and a Portfolio Manager for the ETF along with Minyi Chen.

Partnership with Philippe Cousteau Jr. for the Global Echo ETF (NYSE Symbol: GIVE)

In May 2012, Philippe Cousteau, Jr. partnered with AdvisorShares to launch the AdvisorShares Global Echo ETF on the New York Stock Exchange (NYSE: GIVE) as well as the formation of Global Echo Foundation, a 501 (c)(3) of which he serves as Co-founder and Chairman. Part of the management fee for GIVE goes to the foundation. The Global Echo Foundation provides resources to solve many of the challenges facing the world community from social issues impacting women and children to environmental conservation, as well as supporting social entrepreneurship. This was not the first ETF to donate a portion of its management fee to charity: "Global X debuted its Food ETF (NYSE: EATX) in 2011 it announced that a portion of the management fees would be given to support Action Against Hunger, a humanitarian group that sought to end world hunger. EATX struggled to gather assets, and was shuttered in the first quarter of 2012." The Global Echo ETF currently has under $6 million in assets and is on the ETF Deathwatch list compiled by Ron Rowland. One potential concern investors may have about investing in GIVE is that they don't get a tax write-off for the portion of the management fee that is donated to the charitable foundation, whereas an individual donating the proceeds of a profitable investment to an eligible charity would be able to get a substantial tax write-off. Herb Greenberg gave GIVE the number two spot on his 2013 list of Weird ETFs.

Esposito Securities Suit

"Esposito Securities LLC sued Maryland-based AdvisorShares in Dallas County Court. Esposito claims that the parties signed a mutual nondisclosure agreement in November 2010 and began sharing confidential, nonpublic information with each other." At one point, Esposito explored the possibility of buying an interest in AdvisorShares, but negotiations between the two broke down in mid-2012. "Esposito says, AdvisorShares officer Dan S. Ahrens began sharing confidential information with Esposito's clients and told them not to do business with Esposito. 'Ahrens continually contacted Esposito's clients alleging false, damaging information regarding Esposito, including but not limited to, the fact that Esposito has stolen intellectual property, which is false,' the complaint states."[...] "Esposito claims AdvisorShares violated SEC Rule 5250 by interfering with its client relationships and directing its clients to a market maker and seeding partner." It is ironic that Ahrens would accuse Esposito of stealing intellectual property when the firm he worked for, AdvisorShares, was arguably founded on intellectual property stolen from Arrow Funds. Esposito filed an amended petition on February 22, 2013. The plaintiff alleges that "AdvisorShares induced [former Esposito employee, Justin] Burns to breach his confidentiality agreement whether by financial incentive or the promise of an ongoing broker relationship" and then "strong-armed" sub-advisors to cease trading with Esposito and to instead place trades with Knight Securities, "a broker that was subject to an SEC investigation at the time." "Due to the financial inventive implicit in Defendent's directing fund business to Knight Securities, Defendant is placing its own financial interests in front of its fiduciary responsibility to find the most qualified broker option for the fund."

Company Management

• Noah Hamman, Founder and CEO
• Dan Ahrens, Executive Vice President
• James Carl, Vice President of Business Development, National Sales Director
• Charles Robertson, Director of Marketing

See also

• Exchange-traded fund
• Investment Company Act of 1940
• Harry Dent
• Long/Short investing strategy
• American Depositary Receipts (ADRs)

References

• AdvisorShares Investments, LLC
• AdvisorShares' DENT Tactical Fact Sheet
• AdvisorShares' GRV Fact Sheet
• AdvisorShares' AADR Fact Sheet
• AdvisorShares Investments, LLC Brings a Tailored ETF Investment Vehicle to the Marketplace With Exemptive Relief
• Mars Hill Partners, LLC
• WCM Investment Management
• BNY Mellon