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What are short funds?
There are funds that seek to provide ‘short’ exposure available on the ASX. These are known as ‘Bear funds’. These funds share a number of similarities with, but are distinct from Inverse ETFs. Currently, there are no Inverse ETFs available on the ASX, and such products are most popular in the US. Both Short Funds and Inverse ETFs aim to provide investors with the opportunity to profit from, or protect against falling sharemarkets.
Let’s take a closer look at how the Bear funds work, and their differences with Inverse ETFs:
How do the Bear funds work?
BetaShares offers the only three Bear funds currently traded on the ASX. They provide short but not exactly inverse exposure to the relevant sharemarkets. The BetaShares Bear funds achieve their short exposure by selling share index futures contracts – not by short selling the shares in the index.
See here for an in-depth explanation on how the BetaShares Bear funds work, and how their prices are determined.
See here for information on the features, benefits and risks of Betashares’ Bear funds.
Bear funds available on the ASX
BetaShares offers three Bear funds:
Australian Equities Bear Hedge Fund (ASX: BEAR)
- Exposure to the Australian market
- Designed to provide returns that are negatively correlated to the Australian sharemarket (as measured by the S&P/ASX 200 Accumulation index)
- Exposure aims to be between -0.9x to -1.1x the Index on any given day
Australian Equities Strong Bear Hedge Fund (ASX: BBOZ)
- Geared exposure to the Australian market
- Designed to provide magnified returns that are negatively correlated to the Australian sharemarket (as measured by the S&P/ASX 200 Accumulation index)
- Exposure aims to be between -2x to -2.75x the Index on any given day
U.S. Equities Strong Bear Hedge Fund – Currency Hedged (ASX: BBUS)
- Geared exposure to the U.S. market
- Designed to provide magnified returns that are negatively correlated to the U.S sharemarket (as measured by the S&P 500 Total Return Index)
- Exposure aims to be between -2x to -2.75x the Index on any given day
Why are the Bear funds rebalanced?
As we have shown above, BEAR aims to provide returns that have a correlation of between -90% and -110% with the Australian sharemarket on a given day. BBOZ and BBUS seek to provide returns that have a correlation of between -200% and -275% with the Australian or U.S. sharemarket respectively on a given day. As the underlying market moves, and the price of the fund changes, the fund’s gearing level changes. If the gearing moves outside of the target range, the fund’s exposure will be rebalanced to bring it back within the target range.
Some people incorrectly use the phrases ‘Inverse ETF’, ‘Inverse ETP’, ‘Bear fund’ and ’Short fund’ interchangeably. It is very important to understand that the Bear funds available on the ASX are not “inverse” products.
Clarifying some possible Bear fund misunderstandings
In broad terms, an Inverse ETF would aim to provide daily returns inversely correlated to a specified benchmark. Put simply, if the benchmark went up 1% during the day, the Inverse ETF would go down exactly 1% on the same day (and vice versa). Funds seeking to offer this return feature are not currently permitted in Australia.
The Bear funds are not designed to provide the exact opposite of a relevant benchmark return on a given day. Investors should instead expect a return that falls within a specified range on a given day (and not over any longer period), as described above. It is also important to clarify how the Bear funds obtain their exposure. It may be assumed that the Bear fund short sells all of the securities held in the relevant equity benchmark. This would be expensive and inefficient. The available Bear funds do not achieve their exposure by short-selling the underlying securities – they achieve it by selling futures contracts.
Advantages and Risks
What are the advantages of investing in Bear funds?
Investing in the Bear funds is a simple and cost-effective way to gain short exposure, with no additional paperwork or accounts required (if you already have an account with your broker).
In the case of BBUS and BBOZ, gearing is managed within the fund, so there are no margin calls and an investor cannot lose more than their initial investment. This is different to obtaining a short stock position, where there is unlimited liability given there is theoretically no limit on how far a stock can go up in value.
What are the risks when investing in Bear funds?
It’s important to be aware that portfolio exposure and the gearing ratio (for BBUS and BBOZ) changes day to day. This means that while the fund will generate a return that is negatively correlated to the benchmark on a given day, because of the impact of compounding it is not possible to predict returns over any period greater than one day.
There are also other risks that are fully described in each Bear fund PDS:
- Market risk
- Negatively correlated returns risk
- Futures risk
Tips for using Bear funds
- Don’t set and forget – keep an eye on your position daily
- Read the PDS
- Seek professional advice
How do you buy a Bear fund?
You can buy or sell units in BetaShares Bear funds just like you’d buy or sell any share on the ASX.
All three of the BetaShares Bear funds require no minimum investment (subject to broker requirements).
Australian Bear Funds
| ASX Code | Description | Factsheet |
|---|---|---|
| BEAR | Australian Equities Bear Hedge Fund - Designed to provide returns that are negatively correlated to the Australian sharemarket (as measured by the S&P/ASX 200 Accumulation index). Exposure aims to be between -0.9x to -1.1x the Index on any given day. | Download |
| BBOZ | Australian Equities Strong Bear Fund Hedge - Designed to provide magnified returns that are negatively correlated to the Australian sharemarket (as measured by the S&P/ASX 200 Accumulation index). Exposure aims to be between -2x to -2.75x the Index on any given day. | Download |
International Bear Funds
| ASX Code | Description | Factsheet |
|---|---|---|
| BBUS | U.S. Equities Strong Bear Hedge Fund - Designed to provide magnified returns that are negatively correlated to the Australian sharemarket (as measured by the S&P/ASX 200 Accumulation index). Exposure aims to be between -2x to -2.75x the Index on any given day | Download |
The Bear funds’ strategies of seeking returns that are negatively correlated to market returns is the opposite of most managed funds. Also, gearing magnifies gains and losses and may not be a suitable strategy for all investors. Investors in geared strategies should be willing to accept higher levels of investment volatility and potentially large moves (both up and down) in the value of their investment. Geared investments involve significantly higher risk than non-geared investments. Investors should seek professional financial advice before investing, and monitor their investment actively. An investment in any of the Funds should only be considered as a component of an investor’s overall portfolio. The Funds are actively managed and do not track a published benchmark.
