There are only a handful of true bear funds. Essentially, the portfolio managers use short selling to make money when stocks fall. But it can be a risky strategy — especially when markets are in the bull phase. It’s not uncommon to see sharp negative returns.
Yet when a bear fund is part of a broader portfolio, the overall risk can fall. All in all, you are providing a hedge.
Now keep in mind that this is a common approach for some of the world’s top hedge funds and investors. Hey, Carl Icahn made $100 million in August because of a short position in the S&P 500.
So what are some bear funds to consider? Let’s take a look:
Federated Prudent Bear
By far, the Federated Prudent Bear Fund (MUTF:BEARX) is the largest in the bear category, with $1.6 billion in assets. Then again, it has a top-notch management team, which has more than 45 years of combined investment experience.
As for the fund, about 36.5% of the portfolio is in short positions. But there also is 47.9% exposure to futures. And, to provide some stability, the fund has investments in safe-haven assets like gold and mining stocks.
With the market plunge, the Prudent Bear fund has had a standout performance. Over the past three months, the return was 11.55%. Some of the top short positions include Ford (NYSE:F), Paychex (NASDAQ:PAYX) and HSBC (NYSE:HBC).
PIMCO StocksPLUS TR Short Strategy
Bill Gross, who is the co-CIO and co-founder of PIMCO, is known as the “king of bonds.” Of course, he manages the PIMCO Total Return Fund (MUTF:PTTRX), which has $245.3 billion in assets.
But Gross also manages the PIMCO StocksPLUS TR Short Strategy Fund (MUTF:PSSAX). With it, he focuses on ways to hedge falls in the S&P 500, such as with extremely complex derivatives like futures and swaps.
Because these instruments require only small amounts of capital, Gross uses the additional cash for investments in fixed-income assets (mostly high-rated bonds). It’s a smart way to help boost returns.
Rydex Inverse 2x S&P 500 ETF
The Rydex Inverse 2x S&P 500 ETF (NYSE:RSW) is known as a leveraged inverse fund. This means that if the market falls 1%, your investment will increase by 2%.
Sounds like a good idea? It is. But investors need to be wary of the gut-wrenching volatility. In other words, the fund probably is a better vehicle for a short-term trade.
The name says it all: the Grizzly Short Fund (MUTF:GRZZX). In fact, it tries to be 100% short at all times.
The fund actually takes a quantitative approach to selecting positions — so as to take the emotion out of the trading. What’s more, the fund focuses mostly on larger equities (with market caps over $1 billion). Liquidity certainly is important when short selling.
Tom Taulli is the author of various books, including “All About Commodities.” He does not own a position in any of the stocks named here.