After a long drought, bear mar­ket funds at­tract buy­ers

WALL STREET WEEKAHEAD

Kuwait Times - - BUSINESS -

Bear­ish stock in­vestors are slowly com­ing out of hi­ber­na­tion, as money has be­gun to move into funds that aim to profit when mar­kets dive.

US mu­tual funds that at­tempt to profit in fall­ing mar­kets at­tracted $413 mil­lion in new in­vest­ments dur­ing the se­cond quar­ter, the funds’ largest in­flows since the height of 2013’s “Ta­per Tantrum” sell­off, ac­cord­ing to Thom­son Reuters’ Lip­per re­search unit. On Thurs­day, the S&P 500 ex­pe­ri­enced its first 1 per­cent-plus drop in 58 trad­ing days, as the CBOE Volatil­ity In­dex surged over 44 per­cent, noted Be­spoke In­vest­ment Group.

The sell­ing pres­sure in stocks fol­lows a frus­trat­ing year-to-date for bear­ish stock in­vestors, given that the S&P was up 10.5 per­cent since Dec. 31 as of Wed­nes­day’s close. As of Thurs­day’s close, it is up 8.9 per­cent. Mar­kets this week were set in neg­a­tive mo­tion after the United States and North Korea ex­changed threats. Pres­i­dent Don­ald Trump said Thurs­day that his pre­vi­ous prom­ise of “fire and fury” in re­sponse to any threats from North Korea may have not gone far enough, vow­ing “trou­ble” for the coun­try if its ac­tions do not change.

Brad La­mens­dorf, port­fo­lio man­ager for Ad­vi­sorShares Ranger Eq­uity Bear ETF, said he has seen de­mand for his fund partly driven by “peo­ple that feel like it’s time to hedge.”

“They’re pretty neg­a­tive from a for­ward­look­ing view,” he said. The fund tar­gets stocks with low earn­ings qual­ity or po­ten­tial ac­count­ing prob­lems; it has at­tracted $20 mil­lion this year.

The de­mand for these funds comes after a long drought, and re­mains a mere drop in the bucket within the fund world. The funds posted out­flows in nine of the last 15 quar­ters, ac­cord­ing to Lip­per. By con­trast, do­mes­tic stock mu­tual funds and ex­change-traded funds have at­tracted $32 bil­lion this year, in­clud­ing rein­vested div­i­dends, ac­cord­ing to the In­vest­ment Com­pany In­sti­tute, a trade group.

De­mand for in­ter­na­tional stocks and bonds has been even stronger as in­vestors tried to dial back ex­po­sure to US stocks with­out the ex­pen­sive costs at­tached to hedg­ing strate­gies. The bear funds keep a “net short” ex­po­sure to stocks, aim­ing to rise when mar­kets fall. The cost of mak­ing that bet and the ris­ing mar­kets have helped the cat­e­gory de­liver a neg­a­tive 13.5 per­cent re­turn this year, ac­cord­ing to Lip­per data through early Au­gust.

“It’s sort of be­come al­most a cliche that this has been the most hated bull mar­ket of all time, and I have a hard time buy­ing into that,” said Doug Ram­sey, chief in­vest­ment of­fi­cer of the Leuthold Group LLC, whose firm of­fers a bear fund, the Griz­zly Short Fund.

The com­pany’s tac­ti­cal funds re­cently re­duced their net eq­uity ex­po­sure, but he said he could see an­other fresh top be­fore en­ter­ing a true bear mar­ket.

“We’re only look­ing for a short-term set­back here,” he said. Sev­eral ma­jor as­set man­agers have ex­pressed cau­tion in re­cent days. Bridge­wa­ter As­so­ciates LP’s Ray Dalio wrote on Thurs­day that “prospec­tive risks are now ris­ing and do not ap­pear ap­pro­pri­ately priced in.”

Russ Koes­terich at Black­Rock Inc said in a note this week that tight­en­ing mon­e­tary pol­icy in Europe and the United States could cause po­lit­i­cal un­cer­tainty to morph “from farce into tragedy” by shak­ing in­vestor con­fi­dence. Pa­cific In­vest­ment Man­age­ment Com­pany LLC port­fo­lio man­agers Mi­hir Wo­rah and Geral­dine Sund­strom said US eq­ui­ties are “pop­u­lar and crowded.”

But some in­vestors see the mod­er­ate US eq­uity flows and strength­en­ing de­mand for bear­ish funds as a con­trar­ian sign that the mar­kets may have more room to run. The non­profit Amer­i­can As­so­ci­a­tion of In­di­vid­ual In­vestors found that 36.1 per­cent of in­vestors it sur­veyed ex­pect the mar­ket to rise in the next six months, 2 per­cent­age points be­low that gauge’s his­tor­i­cal av­er­age. An above-av­er­age 32.1 per­cent of in­vestors were bear­ish.

“You don’t see the kind of eu­pho­ria that nor­mally presents at the end of the cy­cle,” said Leon Coop­er­man, chief ex­ec­u­tive of hedge fund Omega Ad­vi­sors Inc. “I don’t see sen­ti­ment char­ac­ter­is­tic of a top.”

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