An easier way to short shares
Exchange-traded fund offers a simple way to put one foot in the bears’ camp without some of the scarier risks of shorting shares.
Earlier this week I made my first ever investment in a hedge fund. I’m betting, in effect, that US sharemarkets have bounced back too far from the lows in March and will fall again as the coronavirus malaise sets in.
Specifically, I invested in a highly-geared, exchange-traded financial product that shorts the S&P 500 futures index.
OK, I was letting fly with jargon there. Truth is that my hedge fund investment was small and simple.
In fact anyone with $100 and a few minutes to spare could do it, though in practice, because of broking fees, it wouldn’t make much sense unless you had $1000 to play with.
It probably helps to set the scene, though. I’m no Warren Buffett – just a journo trying to manage some modest retirement savings that my employer thrust upon me a few years ago when it decided to call time on its own pension scheme.
I could have transferred all the funds from the pension scheme into a KiwiSaver account.
But as I saw little advantage in tying up the savings until I’m aged 65, I decided to manage some myself.
I’ve probably pursued an overly cautious investment strategy.
But in 2016 I invested a small amount in a couple of blue-chip US tech stocks that have outperformed the market and helped drag up my overall returns to respectability.
One of the snags is that there are often quite high foreign exchange margins when buying and selling foreign shares. Those margins and brokers’ fees, plus the fact I don’t have the inclination to closely track stocks, means I want to buy shares pretty much on a set and forget basis for the longer term.
That presents a snag, though, if you are nervous about a market correction or a crash dragging down those investments.
As I write, the S&P 500 market index last closed at 2848 points, which is roughly midway between the high of 3386 the index reached in late February, and the low of 2237 it fell to in late March.
Its recent gains have taken the index back to about the level it was trading at in August last year. Unless there is very welcome news about a coronavirus vaccine, I fear that in the months ahead there is a strong chance the US market could fall back at least to its March low.
And that is where the hedging comes in. To protect my direct investments in US shares and also the US shares I indirectly own via my KiwiSaver account, I invested in a BetaShares hedge fund that is traded under the ticker Bbus on the Australian Securities Exchange.
In essence, it is a very simple product that inversely tracks the S&P 500 index. If the S&P 500 goes up 1 per cent, the value of Bbus will go down about 2 per cent to 2.75 per cent. If the S&P 500 drops 1 per cent, the value of Bbus will go up by about 2 per cent to 2.75 per cent.
Units in Bbus are quoted on the ASX and can be bought and sold via a sharebroker for a minimum fee of about $30 – plus, of course, those foreign exchange margins.
I chose to be conservative. I’m probably only hedging my existing investments against a drop in the US market, rather than taking an active punt that would see me come out on top overall from such a decline.
Bbus is a simple way to put a foot in the bears’ camp, not necessarily the right one for every investor.
If you think, say, Auckland International Airport or Air New Zealand shares are overpriced on the New Zealand stock exchange, it is possible to short specific shares through a service such as one offered by Forsyth Barr subsidiary Leveraged Equities. But that is territory for more professional investors who are prepared to deal with the scarier risks of shorting shares, such as margin calls.
Bbus is hedged back into Australian dollars, so Kiwi investors will lose from any gains the New Zealand dollar makes against the Australian dollar and won’t benefit from any advance by the Aussie against the greenback.
BetaShares also offers two other geared and non-geared exchangetraded hedge products to short the ASX 200 index.
It should be stressed that none of these products is an investment to hold on to for the long term – probably no longer than six months or a year would be very sensible.
Historically, shares rise in value, and Bbus has a 1.38 per cent annual management fee, so if investors hold onto them right through a market cycle, they will be doing it wrong and can expect to see their investment wither away.