Market downturns and the 3 bears

Market downturns and the 3 bears

BY Peter Harper | 14 February 2018
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The volatility and declining performance of the markets over the last few weeks have certainly put some investors on edge and have been a timely reminder that, just as markets were kind to investors last year, and by and large trended up, markets can indeed go down. Given the recent volatility, depending on how your portfolio is positioned you may feel the need to hedge your portfolio rather than look to sell your holdings to defend against any further market downturns.

BetaShares offers a series of “Bear” funds which trade on the ASX – two Funds which provide short exposure to the Australian sharemarket (BEAR and BBOZ) and another which provides short exposure to the U.S sharemarket (BBUS). The objective of these Funds is to provide an investor with a way to profit from, or protect against, a declining sharemarket. Benefits of such an approach may include:

  • The ability to hedge portfolios without selling shares and crystalizing capital gains (CGT) events.
  • Maintaining exposure to dividend income and franking credits – not achievable when moving to cash.

Reducing market risk without tinkering with carefully selected stock portfolios.

How BetaShares Bear Funds work:

These funds seek to generate returns that are negatively correlated to the returns of the relevant sharemarket. The funds predominantly invest their assets in cash and then sell (or short) Index Futures in order to obtain their negatively correlated exposure. Unlike traditional short exposure, where investors’ losses could be theoretically infinite, the Bear suite of funds contain a mechanism by which market exposure is kept within strict ranges. The result is that investors in the Bear funds cannot lose more than their initial investment (in contrast to some other mechanisms that permit shorting such as CFDs). Within these ranges portfolio exposure changes on a daily basis.

  • For the BEAR fund, exposure is kept between -0.9 and -1.1 times the daily movement in futures (i.e. a -1% fall in futures on a given day, could be expected to result in a gain for the fund between +0.9% and +1.1% and vice versa)
  • For BBOZ and BBUS, fund exposure is kept between -2.0 and -2.75 times the daily movement in futures (i.e. a -1% fall in futures on a given day, could be expected to result in a gain for the fund between +2.0% and +2.75% and vice versa)

The approximate ‘portfolio exposure’ on a given day can be found on BetaShares’ website. The portfolio exposure is actively monitored and adjusted to stay within this range. The Funds should not be expected to provide any particular short multiple of the market return over any time period. As such, investors should check BetaShares’ website for details of the respective Fund’s historical performance, as well as the current portfolio exposure, to ensure that the Fund continues to meet their investment objectives.

A recent example of performance

The effectiveness of the Bear funds was shown during the recent market sell off of 5th and 6th of February 2018, when global markets were dragged down by some of the steepest falls seen in the S&P 500 in 6 or 7 years. The falls were driven by rising inflation expectations and resultant beliefs that interest rates may rise faster than previously thought.

Source: Bloomberg. Past performance is not an indicator of future performance.

The chart above shows S&P/ASX 200 Index movements from the 31/1/18 to 7/2/18 in orange. Market declines on the 5th and 6th of February 2018 can be clearly identified. During this period the total return of the S&P/ASX 200 was -2.66%.

Over the same period the performance of the BEAR fund, shown in white, can be seen to be positive, returning +2.91% over the same period.

The BBOZ fund, shown in yellow (which provides a magnified negatively correlated exposure), returned +6.86% over the same period.

This clearly shows the efficiency of the Bear suite of funds as a hedging mechanism during turbulent times.

The Bear suite demonstrated strong liquidity and tight spreads despite market turbulence

Despite the increase in market volatility experienced during the week shown above, the Bear suite of funds moved in line with expectations and demonstrated tight spreads and strong liquidity. Evidence of this is shown below for the BBOZ fund, where spreads can be seen to remain in tight ranges of 1 to 3 cents and with consistent strong bid/offer volumes during the lowest point in the market from 3:30pm – 4:00pm:

Source: Bloomberg. Past performance is not an indicator of future performance.

BetaShares Bear product suite at a glance:

Australian Equities Bear Hedge Fund (Ticker: BEAR) 

Australian Equities Strong Bear Hedge Fund (Ticker: BBOZ)

US Equities Strong Bear Hedge Fund – Currency Hedged (Ticker: BBUS)

Important:  The Funds’ strategies of seeking returns that are negatively correlated to market returns are the opposite of most managed funds. Also for BBOZ and BBUS, seeking to generate magnified returns means both investment gains and losses can be expected to be magnified. As such, the Funds may not be suitable strategies for all investors. Investors should seek professional financial advice before investing, and monitor their investment actively. An investment in a Fund should only be considered as a component of an investor’s overall portfolio. The Funds do not track a published benchmark.

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