Day Trader’s Weekend Aftermarket Lounge 27-29 Mar 2020, page-21

It’s pretty simple really.

Let’s take a look at what these Bear funds do.Australian Equities Bear Hedge Fund (Ticker: BEAR) – provides investors with a simple way to profit from, or protect against, a decline in the Australian sharemarket. The Fund seeks to generate returns that are negatively correlated to the returns of the Australian share market (as measured by the S&P/ASX 200 index).Australian Equities Strong Bear Hedge Fund (Ticker: BBOZ) – aims to help investors profit from, or protect against, a declining Australian share market. It seeks to generate magnified returns that are negatively correlated to the returns of the Australian sharemarket (as measured by the S&P/ASX 200 Index).US Equities Strong Bear Hedge Fund (Ticker: BBUS) – aims to help investors profit from, or protect against, a declining U.S. share market. It seeks to generate magnified returns that are negatively correlated to the returns of the U.S. sharemarket (as measured by the S&P 500 Index), hedged to Australian dollars.How do these funds provide a “short” exposure?These funds sell (or short) SPI Futures in order to obtain their negatively correlated exposure. BetaShares’ website provides what is known as a ‘portfolio exposure’. The portfolio exposure represents the Fund’s approximate exposure, on a given day, to movements in the relevant Index. The level of the portfolio exposure indicates approximately how much the fund is expected to move on that trading day. Let’s take a look at a couple of examples (all before fees and expenses):BEAR – Short Range: -90% to -110%. Assume current Portfolio Exposure: -99.0%If the S&P/ASX 200 moved -1%, BEAR can be expected to be positive ~1% on that trading day (and vice versa).BBOZ – Short Range: -200% to -275%. Assume current Portfolio Exposure: -240.0%If the S&P/ASX 200 moved -1%, BBOZ can be expected to be positive ~2.4% on that trading day (and vice versa).BBUS – Short Range: -200% to -275%. Assume current Portfolio Exposure: -250.0%If the S&P 500 moved +1%, BBUS can be expected to be negative ~ -2.5% on that trading day (and vice versa).Why would you use a “Bear” fund?To seek to protect or hedge your portfolio – by placing a hedge on your portfolio you’re essentially protecting yourself from some of the portfolio downside. You can select the percentage you would like to hedge, and by doing a simple calculation figure out the amount needed to purchase to get the percentage hedge desired.For example, before fees and expenses, if a 15% hedge is desired on a $100K portfolio, then $15K of BEAR would need to be purchased ($100,000 X 15%). If using BBOZ/BBUS assuming a -250% portfolio exposure, then only ~$6K needs to be purchased ($100,000 X 15% / 2.5). As you will see, BBOZ/BBUS are more capital efficient because of the built-in gearing (but also more volatile).Seek to profit from a falling market – If you feel markets are going to go down in value, purchase BEAR/BBOZ/BBUS, which can be expected to go up in value as markets decline (and vice versa).Remain exposed to the US$ – If you currently have an unhedged U.S. equities exposure, because BBUS is currency hedged, you can hedge out equity exposure, but remain exposed to the currency. A strong US$ has historically been associated with declining U.S. equities.Use gearing to your advantage – Built-in gearing on BBOZ/BBUS makes it cost efficient to hedge and easy to use, considering there is no additional paperwork or new accounts needed (if you already have an account with your broker). Also, the gearing is managed within the fund so there are no margin calls for investors and you can never lose more than the initial investment, unlike a short stock position which technically has unlimited liability because theoretically there is no limit on how high a stock can go up in value.