by Tom Taulli | June 6, 2013 11:53 am
The bull market of 2013 has gotten shakier over the past few weeks. Including yesterday’s big drop, the S&P 500 is off 3.4% since it peaked May 22.
It’s likely this market, combined with the current climate — China’s growth in question, Europe remaining stagnant, U.S. interest rates rising — has made investors a little trigger happy, with many now just wanting to protect their nice gains.
As we’ve seen over the years, corrections can be swift and brutal. So if the market’s fall is destined to continue, what can investors do?
Well, one option is to take a look at bear funds. Essentially, these engage in the practice of short selling, which allow investors to gain when stocks fall.
That’s not to imply you should load up on these funds. In fact, over the long-term, they’re traditionally big-time losers. However, they can be useful as a small part of the portfolio for short periods of time to help soften the blow of a market fall.
Here are four such funds to consider:
When it comes to shorting stock, John Del Vecchio and Brad H. Lamensdorf are veterans. The duo even recently published a compelling book on the topic: What’s Behind the Numbers?: A Guide to Exposing Financial Chicanery and Avoiding Huge Losses in Your Portfolio.
It’s a good read and will guide you well, but if you personally don’t have time to dive into a company’s complex financials, then you can invest in their fund: the AdvisorShares Ranger Equity Bear ETF (HDGE).
HDGE’s main focus is to employ deep fundamental analysis to find those companies that have iffy earnings or deteriorating operations. It’s a relatively new fund, launched in 2011, and considering how the market has moved since then, it should be no surprise that its performance since inception has been lackluster. Further dragging down the Bear ETF’s returns is a hefty 1.93% expense ratio.
However, should stocks go into a tailspin, expect low-quality companies to see the most damage, and expect HDGE to thrive.
The Ranger Equity Bear ETF’s current top short positions include Fossil (FOSL), Deutsche Bank (DB) and Amdocs (DOX).
The Grizzly Short Fund‘s (GRZZX) name says it all.
This fund’s main goal is to remain 100% short on stocks — at all times. So, if you are in a particularly dour market mood, then GRZZX should be your instrument of choice.
Grizzly’s portfolio managers, which include Matthew Paschke and Greg Swenson, have a good sense for spotting short-sale candidates, and the fund has shone when the market has gone haywire. A great example is 2008, when the fund returned a staggering 74%.
Some of GRZZX’s current targets include Chipotle (CMG), Fastenal (FAST) and SM Energy (SM). The fund has no sales load but charges 1.52% in expenses and requires a minimum $10,000 investment.
Bond managers can be a pessimistic group. After all, they generally make money when interest rates are falling — and that often happens when the economy is lagging.
In light of this, it seems fitting that the world’s top bond manager, Bill Gross, manages a fund that shorts the S&P 500 — the PIMCO StocksPLUS AR Short Strategy (PSSAX) fund.
The PSSAX has a twist, however. Gross uses futures to short the S&P, meaning he only needs to put a fraction of money down as margin for his positions. He invests the rest of the capital in bonds.
The strategy has worked so far. Again using the 2008 financial crisis as an example, PSSAX tallied a 47% return amid the S&P 500’s 37% decline.
AR Short Strategy charges 1.04% in expenses and a maximum 3.75% sales charge, and requires a minimum investment of just $1,000.
When discussing equities, beta refers to the correlation (or lack thereof) of a stock’s volatility to that of the S&P 500. In short, a beta of 1 means a stock essentially tracks the overall market, a higher number means the stock is more volatile, and a lower number means it’s less volatile.
This matters during a bear market, because when stocks as a whole are doing poorly, high-beta stocks tend to be doing the worst as investors flee riskier positions.
The QuantShares’ U.S Market Neutral Anti-Beta Fund (BTAL) capitalizes on this trend by shorting high-beta stocks and purchasing low-beta stocks.
There’s little to go on performance-wise, as this ETF only launched in late 2012. However, it hasn’t been hit nearly as hard as other pure bear funds so far in 2013’s bull market. Losing 4.7%
In terms of the performance, there is not much to go on because it was launched in late 2012. Yet it has not gotten hit as hard as other pure bear funds amid the S&P 500’s nearly 13% year-to-date run. While funds like PSSAX and HDGE have declined in the low double-digits, BTAL has only fallen off by less than 5%.
BTAL charges 1.49% in expenses.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
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