What is a 'Bear Fund'

A bear fund is a mutual fund that looks to provide higher returns amid market downturns. Bear funds can be actively managed or designed to follow an index. In the example of an index bear fund, the fund tracks the inverse of the index.


A bear fund may be worth looking into for investors interested in hedging their exposure to market downturns. In particular, bear funds may be useful for short-term investment purposes. 

Investing strategies used in bear funds typically follow several different paths. The fund may bet against the broader market by purchasing put options on an index while selling short futures in the same index. Another strategy is to sell specific securities short in the hope that their share values dip. In addition, the fund may invest in assets that have a tendency to gain value during periods of when the market falls, such as gold or other precious metals.

Overall, there is an element of volatility to several of the strategies that bear fund managers deploy. A bear mutual fund may be a way for investors to find alpha during turbulent times, but this type of should never be an investor's only holding.

Bear Fund Risks

Bear funds have a poor track record of performance, making an investment in them a risky proposition for those unfamiliar with their mechanics. One issue that works against bear funds is that bear markets tend to be shorter in duration than bull markets, which makes timing the market critical. Unfortunately, market timing is much easier said than done, even under the best of market scenarios. Also, many bear funds use strategies that do not particularly suit investors with a long-term time horizon. Even when the market is flat, investors can still lose out because index bear funds that use derivatives can lose because of the tactics they employ and their relatively high expenses.

However, there are some positives to a bear fund. In particular, it's relatively safer to bet against the market’s direction than taking other more aggressive alternatives. For example, bear funds are safer than a short position in a stock because losses are limited. 

Generally speaking, bear funds may be useful for investors that are looking to embrace a tactical position over the short term. However, as a long-term investment strategy, bear funds do not make much sense for most investors because of the market’s historical upward trajectory. 

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