The short funds winning from market volatility
While many Australian equity funds are suffering, two ETFs are managing to achieve strong gains as a result of their short positioning.
The BetaShares Australian Equities Bear Hedge (BEAR) fund and the Australian Equities Strong Bear Hedge (BBOZ) have returned 29.7% and 72.9% since the start of 2020 to 19 March, according to FE Analytics, versus losses by the ASX 200 of 27%.
The short equity funds were negatively correlated to the Australian stockmarket and positioned to rise when markets were falling and vice versa. If the stockmarket falls by 1%, the BEAR fund would return 0.9%-1.1% while the BBOZ fund would return 2%-2.75%.
Alex Vynokur, chief executive of BetaShares, said: “Advisers see this as a form of insurance policy, a way they can protect against equity losses. The funds allow them to maintain equity exposure but hedge the risk of fall in value in a time of significant market volatility.
“The clients most vulnerable to this volatility are retirees and pre-retirees because they are reliant on their portfolio to provide them income in retirement. If the market falls significantly then they will likely need to sell part of their portfolio which creates a permanent loss of capital.”
As a result, the two funds (and its US equities counterpart BBUS) had seen ‘very significant’ inflows of $250 million since the start of the year.
“We have seen an increase in inflows and in trading volumes, it has spiked significantly, we are seeing 25-30x more than we did in the same period last year,” Vynokur said.
But he stressed, it was important to maintain a diverse portfolio and any investment allocated to the funds would depend on investors’ current asset allocation.
"Some people have already been diversifying their portfolios so they would need less whereas others might want a more meaningful hedge in place.
"The economic consquences of COVID-19 are not certain, this is unchartered territory, now is not the time to panic, it is the time to make prudent and rational investment decisions."
Performance of BEAR and BBOZ versus ASX 200 from 1 January, 2020 to 19 March, 2020
AUTHOR
Laura Dew
Recommended for you
Infrastructure assets are well-positioned to hedge against global uncertainty and can enhance the diversification of traditional portfolios with their evergreen characteristics, an investment chief believes.
Volatility in US markets means currency is becoming a critical decision factor in Australian investors’ ETF selection this year.
Clime Investment Management is overhauling the selection process for its APLs, with managing director Michael Baragwanath describing the threat of a product failure affecting clients as “pure nightmare fuel”.
Global X will expand its ETF range of exchange-traded funds next month with a low-cost Australian equity product as it chases ambitions of becoming a top issuer of ETFs in Australia.
