You’ll notice I didn’t use an image of a teddy bear for this blog entry. The reason for this is that the “bear” I’m blogging about is not cute. It is not cuddly. And it doesn’t lick honey off your face. It’s a U.S. Strong Bear!
The BetaShares U.S. Equities Strong Bear Hedge Fund – Currency Hedged (‘U.S. Strong Bear Fund’) is traded on the ASX just like any listed share and comes into its own, with its head low and its nostrils flaring, when the U.S. share market is going down!
You may recall from my last post on the Geared US Equity Fund, that I am new to BetaShares and getting my head around the products, existing and new. So I’m getting some leverage off my work and study here by sharing it with you. This note is in that vein – I’d like to discuss why investors might be interested in the U.S. Strong Bear Fund and what they can expect from the product.
Why invest in the U.S. Strong Bear Fund? To seek to profit from, or protect against, a U.S. share market fall
With a Federal Reserve rate hike expected in the last quarter of 2015 and continuing volatility in China and Greece, some investors are understandably concerned about the outlook for U.S. equities.
The U.S. Strong Bear Fund has been set up to allow investors to hedge their portfolio against, or profit from, falls in the U.S. share market. It does this as the U.S. Strong Bear Fund is expected to move in the opposite direction to the direction of the S&P 500 index, on a magnified basis.
Put simply, if the:
- S&P 500 moves up 1% in USD terms on a day
the Fund is expected to move down between -2.0% and -2.75% in AUD terms
- S&P 500 moves down -1% in USD terms on a day
the Fund is expected to go up between 2.0% to 2.75% in AUD terms
Another way to think about it is one USD burger is equivalent to at least two inverted AUD meat pies.
It’s hard to tell, but the burger immediately above is upside down! Symbolising that a -1% fall in the USD value of the S&P 500 should equate to at least a 2% gain in the U.S. Strong Bear Fund’s unit price, in AUD.
The Fund is actively managed and should not expect to provide any particular “short” multiple of the U.S. share market return over any time period.
Protect and profit?
If an investor has been holding U.S. equities for some time they may be sitting on a substantial gain. To protect themselves from a potential fall in the U.S. share market, conventional wisdom would be to sell their U.S. holdings. One of the issues with this is it would crystallise any unrealised capital gains, so would not be very tax efficient.
Another way to protect a portfolio is to sell futures, but not many individuals have futures accounts set up to do this.
In order to seek to overcome these issues, BetaShares created the U.S. Strong Bear Fund. Every $1 invested in U.S. Strong Bear Fund is expected to move in the opposite direction to approximately $2 to $2.75 invested in the S&P 500 index, providing another way to help de-risk a portfolio.
There is little or no currency exposure in the U.S. Strong Bear Fund as it is substantially currency hedged.
U.S. Strong Bear Fund seeks to be negatively correlated to the S&P 500 return in U.S. dollars, not the S&P 500 return in Australian dollars, because of the currency hedging. This is important. The S&P 500 return in U.S. dollars, not Australian dollars, is what drives the Fund’s performance.
Another potential way to use U.S. Strong Bear Fund is against other overseas share markets. To the extent that non-U.S. share markets are correlated with the U.S. share market the Fund should provide a hedge against them as well. It’s not perfect, however it still may be one of the best vehicles available at present for many investors. If you think the U.S. leads the way, especially down, the Fund may also be an effective tool to use to protect a more global portfolio.
Ability to invest in the U.S. share market on the ASX
The Fund can be bought on the ASX, using ticker BBUS.
This means that the Fund can be traded on the ASX just like any listed share, during market hours.
Transparent, real time pricing guide
Like all of BetaShares Funds, market makers make bids and offers at a margin around fair value. Individuals can trade within this price range around fair value at pretty much any time the share market is open.
When the U.S. share market is not open, market makers have an expectation of what fair pricing should be from the futures market, as it gives the best indication of where the S&P 500 index is expected to open. Whilst the Fund does not trade futures, they provide price guidance so a fair pricing indication can be accessed whenever the Australian market is open.
For those who like details: The strategy behind the U.S. Strong Bear Fund
For every $1 invested in the Fund, BetaShares sells around $2 to $2.75 of exposure to the S&P 500.
There is no debt involved in establishing this magnified “short” exposure. Nor is there any material currency exposure. And there’s no magic involved either, we do this by selling futures contracts.
The value of the S&P 500 index is what drives the price of a futures contract. I can write a more technical note on how futures work if blog readers express an interest. Feel free to comment below.
Futures are the most common vehicle which institutional investors use to instantaneously gain exposure to markets with minimal market impact. $1 of futures exposure is equivalent to $1 of underlying asset, so we sell futures in the ratio of at least 2 to 1 (in fact between 2 and 2.75x) to get the gearing level of the Fund to be as indicated on the can (investors can see the actual gearing level that the Fund has at any time by checking out our website).
Example screenshot of our website providing an indication of the actual “portfolio exposure” of U.S. Strong Bear Fund. On this day, if we assume the S&P 500 Index went down 1%, the Fund would be expected to rise ~2.47% (before fees and expenses). The opposite outcome would arise if the S&P 500 Index went up 1% on that day.
As we hold the funds invested in U.S. Strong Bear Fund in Australian dollars, there is no currency exposure to the U.S. dollar at the very outset.
As the S&P 500 index futures move there will be exposure to the U.S. dollar, equal to the amount of the move. We substantially remove this currency exposure by managing the Fund’s holdings of Australian and U.S. cash, including by borrowing U.S. dollars as necessary and holding the proceeds in Australian dollars.
End result: for every $1 move in the S&P 500 in U.S. dollar terms, the Fund is expected to move in the opposite direction around $2 to $2.75. Traded on the ASX, in Aussie dollars. Keep in mind that, investors should expect bigger swings in the Fund’s returns, up or down, compared to an un-geared fund, and should check the suitability of their holdings regularly, just as they should with any “short” position in the market.
If you want real-time ability in Australia to trade against the U.S. market on the ASX, with currency exposure largely removed, an investment in the U.S. Strong Bear Fund may be worth the look.
Happy investing. Be careful out there.
Please note: The Fund’s strategy 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 the Fund should only be considered as a component of an investor’s overall portfolio. The Fund does not track a published benchmark.