Bear Fund

What Is a Bear Fund?

A bear fund is a mutual fund that investors use to give higher returns in the midst of market downturns. Bear funds can be actively managed or intended to follow an index. In the case of an index bear fund, the fund tracks the inverse of the index.

Bear funds will generally be appealing to investors who need to hedge their exposure to market downturns. Bear funds are likewise valuable for short-term investment purposes.

Understanding a Bear Fund

Investing strategies utilized in bear funds regularly follow several unique ways. The fund might wager against the more extensive market by purchasing put options on a index while selling short futures in a similar index. Another strategy is to sell specific securities short in the hope that their share values dip. Furthermore, the fund might invest in assets that tend to gain value when the market falls, like gold or other precious metals.

Overall, there is an element of volatility to several of the strategies that bear fund managers convey. A bear mutual fund might be a way for investors to find alpha, also called "excess return" or "abnormal rate of return," during violent times, yet a bear fund ought to never be an investor's just holding.

Bear Fund Performance

Bear Funds have a history of poor performance, making an investment in them a hazardous proposition for those new to their mechanics. Stock market returns can swing from positive or negative step by step over periods of a decade or more. Likewise, one issue that neutralizes bear funds is that bear markets will generally be shorter in duration than bull markets, which makes timing the market critical.

Tragically, market timing is a lot far from simple or easy, even under the best of market situations. Likewise, many bear fund strategies don't especially suit investors with a long-term time horizon. Even when the market is level, investors can in any case miss out on the grounds that index bear funds that utilization derivatives may not perform well on account of the strategies they utilize and their moderately high expenses.

Notwithstanding, there are a few benefits to a bear fund. Specifically, it's generally more secure to wager against the market's heading than to expect a more aggressive position. For instance, bear funds are more secure than a short position in a stock since losses are limited.

Special Considerations

Bear, by and large, funds might be valuable for investors who are hoping to embrace a tactical position over a shorter period of time. Nonetheless, as a long-term investment strategy, bear funds don't check out for most investors due to the market's historical vertical direction.

Illustration of a Bear Fund: Rydex Inverse S&P 500 Fund

There are several bear market mutual funds and ETFs. One model is the Guggenheim Rydex Inverse S&P 500 Strategy fund (RYURX), which attempts to repeat the inverse daily performance of the S&P 500 index. This means that in the event that the S&P 500 increases by 5% in a day, this fund will go down by roughly 5%, and on the off chance that the S&P 500 goes down 5% in a day, the fund will increase 5%. The fund endeavors to do this by holding various investments including mutual funds, federal agency notes, and repurchase agreements. The S&P 500 is an index of 505 huge cap U.S. stocks.

As per Morningstar, "The fund utilizes as its investment strategy a program of participating in short sales of securities remembered for the underlying index and investing to a huge degree in derivative instruments. It will invest somewhere around 80% of its net assets, plus any borrowings for investment purposes, in financial instruments with economic attributes that ought to perform inverse to the securities of companies remembered for the underlying index."

Highlights

• Bear funds have a history of poor performance.
• Bear funds follow an index, and the fund tracks the inverse of the index.
• A bear fund is appealing for investors who need to hedge their exposure to market downturns or those searching for a short-term investment.
• A bear fund is a mutual fund intended to give higher returns in the midst of market downturns.