BEARISH INVESTORS ON THE MOVE
Mutual funds that attempt to profit in falling markets have attracted US$413m in new investments in Q2
BEARISH stock investors are slowly coming out of hibernation, as money has begun to move into funds that aim to profit when markets dive.
United States mutual funds that attempt to profit in falling markets attracted US$413 million (RM1.77 billion) 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 one per centplus drop in 58 trading days, as the CBOE Volatility Index surged over 44 per cent, 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 per cent since December 31 as of Wednesday’s close. As of Thursday’s close, it is up 8.9 per cent.
Markets this week are set in negative motion after the US and North Korea exchanged threats.
US President Donald Trump said on Thursday his previous promise of “fire and fury” in response to any threats from North Korea might have not gone far enough, vowing “trouble” for the country if its actions did not change.
Brad Lamensdorf, portfolio manager for AdvisorShares Ranger Equity Bear ETF, said he had seen demand for his fund partly driven by “people that feel like it’s time to hedge”.
“They’re pretty negative from a forward-looking view,” he said. The fund targets stocks with low earnings quality or potential accounting problems; it has attracted US$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 exchangetraded funds have attracted US$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 per cent return this year, according to Lipper data through early August.
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 last week tightening monetary policy in Europe and the US could cause political uncertainty to morph “from farce into tragedy” by shaking investor confidence.
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 non-profit American Association of Individual Investors found that 36.1 per cent of investors it surveyed expect the market to rise in the next six months, two percentage points below that gauge’s historical average. An above-average 32.1 per cent of investors were bearish. Reuters