With the S&P 500 up nearly 6% year to day, and nearly 11% over the past twelve months, some investors are beginning to predict a correction and even a prolonged bear market period for equities. Given global macro uncertainty, it seems plausible that this bull run is nearing an end. Investors seeking to profit from a downward move may want to consider investing in bear funds, mutual funds which take short positions on the market and profit when prices go down. (See also: Top 5 Bear Market Mutual Funds.)
Bear Mutual Funds
According to Barron's, a recent survey indicates that equity analysts are the most pessimistic they've been on the stock market since the dotcom bubble popped. Other large, well-known investors, such as George Soros and Carl Icahn have also disclosed sizeable short positions, or bets that the market will drop. Investors who share the same sentiment may want to consider bear mutual funds, which take short positions in the stock market. These funds have performed poorly during the bull run but may show outsized gains in the case of a correction.
One of the largest such bear funds that investors can purchase, with nearly $500 million under management, is the actively managed Federated Prudent Bear Fund (BEARX), which holds both long and short positions, but is net short the market. It holds what it perceives as undervalued long positions in stocks such Berkshire Hathaway Inc. (BRK.A), Wal-Mart Stores Inc. (WMT) and SPDRs on the Financial Sector (XLF), and simultaneously shorts the S&P 500 index to a greater degree, with total short exposure 135% of the portfolio. The fund is down nearly 4% YTD and down 16% over the past five years.
Another is the Grizzley Short Fund (GRZZX), with just over $200 million,which at any given moment holds positions in approximately 60 to 100 stocks that it has sold short. Currently its largest short bets are on the S&P 500 index, followed by a fairly equally weighted 2% of the portfolio in various other companies it deems overvalued. The fund is down 14% year to date.
PIMCO's $2 billion StocksPLUS Short Fund (PSSAX) shorts the S&P 500 index while purchasing fixed income securities. Due to the concurrent rally in the bond market of late, the fund is down only 4.3% YTD.
In an interview with Barron's portfolio manager Brad Lamensdorf who manages the AdvisorShares Ranger Equity Bear ETF (HDGE) revealed short bets on specific stocks in his fund such as Under Armour Inc. (UA), Nike Inc. (NKE), Carters Inc. (CRI), and most notably, troubled Deutsche Bank (DB), which has fallen more than 50% this year. HDGE is down just under 10% YTD.
The Bottom Line
Bear funds, which take short positions in the market, have done relatively poorly as a prolonged bull market has persisted since the recovery from the Great Recession. Many investors, however, are fearing a looming correction, and are therefore considering these sorts of fund. If a bear market does indeed occur, owners of these funds will expect to profit.