Introducing Betashares Geared Long and Short Bond Funds

Investors seeking an efficient way to express their view on bond prices and interest rates historically have had limited options.

Accessing the bond market directly is beyond the reach of most non-institutional investors. The process of establishing a meaningful position in physical bonds requires significant capital. And for investors seeking geared long or short exposure to bonds, the options have been extremely limited, and typically involve significant complexity and risk.

With that in mind, Betashares has launched the Betashares Geared Long and Short Bond Funds. The Fund range:

  • includes both long funds and short funds – enabling you take a view in either direction i.e. that bond prices will rise or that they will fall
  • is geared, providing leveraged exposure – and lowering the amount of capital you need to invest compared to an unleveraged position (albeit with higher levels of risk)
  • offers exposure to both Australian government and US Treasury bonds.

GGAB Geared Long Australian Government Bond Fund (hedge fund) provides cost-effective geared exposure to 10-year Australian Treasury Bonds.

BBAB Geared Short Australian Government Bond Fund (hedge fund) aims to generate magnified returns that are negatively correlated to the returns of 10-year Australian Treasury Bonds.

GGFD Geared Long U.S. Treasury Bond Fund – Currency Hedged (hedge fund) provides cost-effective geared exposure to 10-year US Treasury Bonds.

BBFD Geared Short U.S. Treasury Bond Fund – Currency Hedged (hedge fund) aims to generate magnified returns that are negatively correlated to the returns of 10-year US Treasury Bonds.

How do the Funds work?

Betashares Geared Long and Short Bond Funds invest all their assets in cash and cash equivalents, and either buy or sell bond futures contracts:

  • The Australian Funds obtain their exposure via ASX 10-year Australian Treasury Bond Futures.
  • The US Funds obtain their exposure via CME Ultra 10-year US Treasury Note Futures.

The two futures contracts reflect the returns of an underlying Australian or US government bond, respectively, with 10 years to maturity (each the ‘reference bond’).

Geared Long Funds Geared Short Funds
Australian Funds Buy 10-Year Australian Treasury Bond Futures Sell 10-Year Australian Treasury Bond Futures
US Funds Buy 10-Year US Treasury Note Futures Sell 10-Year US Treasury Note Futures

Buying bond futures can generally be expected to generate a positive return for the Long Funds when the reference bond rises in value (and a negative return when the bond falls in value). Buying bond futures typically reflects a view that long-term interest rates will fall.

Selling bond futures can generally be expected to generate a positive return for the Short Funds when the reference bond falls in value (and a negative return when the bond rises in value). Selling bond futures typically reflects a view that long-term interest rates will rise.

The Funds employ no borrowing.

Gain leveraged exposure

Betashares Geared Long and Short Bond Funds are designed to generate magnified returns.

The Long Funds seek to generate magnified returns that are positively correlated with the returns of the relevant reference bond, and would typically be used by investors whose view is that Australian (GGAB) or US (GGFD) long-term interest rates will fall.

An increase of 1% in the value of the reference bond on a given day can generally be expected to result in a 2.5 – 3.0% increase in the value of the relevant Long Fund (and a corresponding decrease in the value of the Long Fund if the reference bond falls in value).

The Short Funds seek to generate magnified returns that are negatively correlated with the returns of the relevant reference bond, enabling you to trade a view that bond prices will fall, and would typically be used by investors whose view is that Australian (BBAB) or US (BBFD) long-term interest rates will rise.

A decrease of 1% in the value of the reference bond on a given day can generally be expected to result in a 2.5 – 3.0% increase in the value of the relevant Short Fund (and a corresponding decrease in the value of the Short Fund if the reference bond increases in value).

The chart below shows the expected price movements in the value of the Funds, given a 1% rise in the value of the relevant reference bond on a given day.

Illustrative example only. Returns exclude the effect of fund management costs of 0.99% p.a.

The chart below shows the expected price movements in the value of the Funds, given a 1% fall in the value of the relevant reference bond on a given day.

Illustrative example only. Returns exclude the effect of fund management costs of 0.99% p.a.

The Funds’ investment exposure is monitored on a daily basis and rebalanced as required, with the aim of keeping gearing within the range of +250 to +300% of net asset value for the Long Funds, and -250 to -300% of net asset value for the Short Funds.

It is essential to understand that because of the rebalancing process, each Fund’s returns will not necessarily be in the relevant target range over periods longer than a day. The more volatile the bond market, and the longer an investor’s holding period, the greater the deviation may be from the daily target exposure range.

Use Betashares Geared Long and Short Bond Funds to adjust interest rate risk

If you hold physical bonds, or bond funds, you can use the Betashares Geared Long and Short Bond Funds to change the sensitivity of your overall fixed income exposure to movements in Australian or US long-term interest rates – or, in fixed income terminology, change the ‘duration’ of your bond portfolio.

Increasing the duration of your bond portfolio will add interest rate risk i.e. make it more sensitive to changes in interest rates. Decreasing duration will reduce interest rate risk i.e. make your bond portfolio less sensitive to changes in interest rates.

Investing in the Long Funds can increase the duration of a bond portfolio, while investing in the Short Funds can decrease the duration of a bond portfolio.

Investors might employ this strategy to:

  • adjust their portfolio back towards a fixed income benchmark or other target, or
  • reflect their view on likely movements in bond yields.

For example, an investor who has exposure to Australian government bonds via a portfolio of physical bonds, or an ETF such as the Betashares Australian Government Bond ETF (AGVT), and is concerned about a potential increase in long-term interest rates, could reduce their interest rate risk by investing in GGAB.

Betashares Geared Long and Short Bond Funds
Leverage factor +2.5x – +3.0x (long), -2.5x – -3.0x (short)
Access Bought and sold like shares
Trade both directions Can be used to trade a view that long-term interest rates will fall, or that they will rise
Downside risk Limited to capital invested
Potential for margin calls None for investors, as gearing is implemented within each Fund
Regulation Registered managed fund – high level of Australian investment vehicle regulation
Counterparty risk The Fund invests in cash and buys / sells exchange-traded futures (which are centrally cleared), which reduces counterparty risk.

 

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Written by

Richard Montgomery

Manager – Investment Communication

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