POST OF THE DAY
Mutual Funds
Bear Fund no Hedge?

Related Links
Discussion Boards

By Littlechap
May 6, 2009

Posts selected for this feature rarely stand alone. They are usually a part of an ongoing thread, and are out of context when presented here. The material should be read in that light. How are these posts selected? Click here to find out and nominate a post yourself!

... I'm interested in this bear type of fund because it may be simpler to implement to hedge my long portfolio than options or stop limits on my long positions. With it, I can simply buy and hold for a little while until I feel the risk of a significant pullback has passed. The alternative is deciding on an appropriate action on each of the 35+ individual stocks in my medium term portfolio. Medium term to me is 10-15 years.

On the run, a couple of quick reactions:

1) I don't see a bear fund as a "hedge" against potential losses in a diversified stock portfolio. I see it as a counterbalance that simply goes up when the other side goes down, or vice-versa. As I said before, the most likely effect is that you simply turn your portfolio into a bunch of securities whose aggregate ROI is flat while costing a bunch of fees that could result in a net negative.

2) Lots of people define "hedge" differently, but for my purposes a hedge by definition would be a different asset class, something whose price moves *independently* from that of my primary investment vehicle. Your primary vehicles are long stock positions. A bear fund is not independent from stock prices. On the contrary, it is very specifically designed to move in the opposite way from the overall market *at all times*. Even if constructed from derivatives or whatever, its price is not independent from the stock market.

Contrast that with prices of commodities, currencies, bonds, even real estate. Also, to some extent, I think some foreign stocks may have (once again) become more "de-coupled" from the U.S. market lately. And of course, there's cash, as mentioned earlier.

Historically I believe most people have viewed bonds as a hedge against stock price, because if held to maturity (which 10-15 years certainly allows you to do) you can get a guaranteed yield without having to worry about fluctuations in the bond's trade value. This strikes me as far superior to using a Bear fund, but these are personal opinions that might not be right for everybody.

Hope this helps. Good luck!