Among the suite of exchange traded products we have launched, one of the most unique to the Australian market place is the Australian Equities Bear Hedge Fund (ASX: BEAR). This post explains the Fund’s investment strategy and examines the extent to which its performance to date has lived up to its promise. It then considers how the Fund can be used by investors in practice.
The Bear Hedge Fund
The BetaShares Australian Equities Bear Hedge Fund (ASX Code: BEAR) is an ASX exchange traded managed fund that has a simple objective – to go up when the market goes down (and vice versa). It seeks to achieve this by investing in cash and selling ASX SPI 200 futures such that a 1% fall (rise) in the broad Australian share market on any given day can be expected to produce between a 0.9% to 1.1% rise (fall) in the net asset value of the Fund (before fees and expenses).
As such the Fund gives investors a simple way to profit from, or protect against, a decline of the Australian share market via purchasing an ASX-traded fund.
Note that the Fund does not use borrowing, or any other instrument (including derivatives), for the purposes of leveraging its returns (although market movements may cause the Fund to be slightly leveraged on any given day). All payment obligations relating to investments are met within the Fund, so that investors are not at risk of margin calls – i.e. investors cannot lose more than their original investment.
By using the Bear Hedge Fund, investors can avoid the complications and costs associated with the more traditional ways of obtaining short market exposure through CFDs, options or futures.
Historical Performance of the Bear Fund
As seen in the table and chart below, the Bear Hedge Fund has managed to achieve performance similar, but opposite, to the performance of the benchmark S&P/ASX 200 index over both relatively short and longer-term intervals.
That said, it should be remembered the Bear Fund’s portfolio is managed actively and it should not be expected to provide the exact opposite of the market return over any time period. As such, investors should check BetaShares’ website frequently for details of the Fund’s historical performance, as well as the current portfolio exposure, to ensure that the Fund continues to meet their investment objectives.
1) Hedging Portfolio Exposure or “Shorting” the Market.
The first and most obvious strategy that lends itself to use of the Bear Hedge Fund is hedging one’s portfolio exposure – or actively shorting the market – when the risk of a significant market pull back is considered sufficiently high.
For example, imagine you owned a diversified portfolio of Australian equities with a current market value of $100,000. Due to weakness in the economy, rising interest rates and/or high market valuations, you may have become concerned that the market could be at risk of a significant correction. To protect the value of your portfolio, one option would be buy $100,000 worth of units in the Fund. As at 9 March 2015, the Fund was trading at around $9.50 per unit, meaning $100,000 exposure would require the purchase of around 10,500 units.
Imagine now that the market did indeed fall by 15% over the following month, which was also reflected in an overall 15% decline in the value of your original equity portfolio – or $15,000. Assuming the Fund performed as expected over this period, the unit price would have increased by around 15% to ~$10.90 – implying a gain on the trade of ~$14,700, which would broadly offset the loss on your original portfolio.
Note the Fund also provides the flexibility to only partly hedge your portfolio – buy buying less than $100,000 worth of units – or to take a net short position in the market through buying more than $100,000 worth.
2) Pairs-trading with Sector ETFs or Individual Stocks
Another possible strategy involving the Bear Hedge Fund is market neutral “pair” or “long/short” trading, where you feel a certain sector or stock is likely to outperform the overall market.
Consider, for example, that due to declining interest rates and strong growth in lending, you assess it likely that the overall financial sector will outperform the S&P/ASX 200 index over a time period – irrespective of whether the index rises or falls. In this case, you could decide to buy, say $10,000 worth of exposure to the financial sector (through, say, the BetaShares S&P/ASX 200 Financials Sector ETF), while also buying $10,000 worth of exposure to the Bear Hedge Fund. This overall “pairs” or “long/short” trade should make money provided the financial sector outperforms the market – irrespective of the overall movement in the market.
A similar trade could be set up using the BetaShares S&P/ASX 200 Resources Sector ETF should you consider that the resources sector will outperform the market.
And, of course, similar trades could be set up using any ETF or individual company stocks you consider likely to outperform the market. By pairing these investments with an equal and offsetting investment in the Bear Hedge Fund, you substantially eliminate the impact of overall market movements on the potential profitability of the trade.