What Is a Bear Fund?

A bear fund is a mutual fund that investors use 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.

Bear funds tend to be attractive to investors who want to hedge their exposure to market downturns. Bear funds are also useful for short-term investment purposes.

Key Takeaways:

  • A bear fund is a mutual fund designed to provide higher returns amid market downturns.
  • Bear funds follow an index, and the fund tracks the inverse of the index.
  • Bear funds have a history of poor performance.
  • A bear fund is attractive for investors who want to hedge their exposure to market downturns or those looking for a short-term investment. 

Understanding a Bear Fund

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 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, otherwise known as “excess return” or “abnormal rate of return,” during turbulent times, but a bear fund should never be an investor's only holding.

Bear Fund Performance

Bear Funds have a track record of poor performance, making an investment in them a risky proposition for those unfamiliar with their mechanics. Stock market returns can swing from positive or negative year by year over periods of a decade or more. Also, 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 fund strategies 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 may not perform well because of the tactics they employ and their relatively high expenses.

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

Special Considerations

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