Bear market funds seek positive returns in down markets, so it isn't surprising that they are mauling the competition and generating plenty of investor attention in the process.
Bear mutual funds had an average return of 8.2% year-to-date as of July 23, according to Morningstar Inc. of Chicago.
Exchange traded funds with a bear slant had an average return of 10.29% for the same period. With the Standard & Poor's 500 stock index down 11.67% for the period, investors have taken notice, re-warding bear funds with millions in assets.
Bear market ETF assets stood at $16.11 billion at the end of June, up from $7.39 billion at the end of last year. Bear mutual funds stood at $5.1 billion at the end of June, up from $4.47 billion at the end of last year, according to Morningstar.
For all their success, however, financial advisers are split as to whether bear funds are a good thing.
"For most investors, I would strongly urge them to stay away from these types of investments," said Jim Davis, a managing partner with Partnership Financial LLC, a Grove City, Ohio-based firm with $40 million under management.
TRICKY INVESTING
It is tricky investing in bear funds because they sell short, buy put options, use leverage or employ other complicated strategies, he said.
"A lot of advisers aren't going to understand the process," Mr. Davis said. "Most folks don't need that kind of risk."
Others think such funds aren't all that complicated.
"As with any packaged investment such as this, it has its place as a tool in
portfolio management," said Ryan Darwish, principal of Darwish Capital Management in Eugene, Ore. "In a modern portfolio ... they are simply assets which have a negative correlation to market performance."
Bear funds have proven themselves to be invaluable tools, said J. Michael Martin, president at Financial Advantage Inc., a Columbia, Md.-based firm with $260 million in assets.
Investments in three bear funds "helped us have a 1% total return on our portfolios versus about a 12% loss in the [S&P 500]," he said.
But bear funds are only valuable if markets are in decline, and since calling a drop in the market is market timing, such a strategy can be dangerous, said Kevin Young, principal of Young Wealth Management LLC of Davis, Calif.
"People can get themselves in a lot of trouble," said Mr. Young, who declined to give his firm's assets under management.
Despite such concerns, most industry experts believe money will continue to flow into bear funds, especially now that one of the biggest names in mutual fund management has jumped on the bandwagon.
On July 15, Federated Investors Inc. of Pittsburgh announced that it is acquiring the $1.2 billion Prudent Bear Fund and the $507 million Prudent Global Income Fund.
The Prudent Bear Fund is considered the gold standard among a short list of actively managed bear funds, said David Kathman, an analyst at Morningstar.
"I've always thought it was the best of the bear funds," he said.
Federated is acquiring both funds for a $43 million initial payment and future contingent payments of up to $99.5 million over the next four years.
Prudent Bear is one of the best known bear funds, and with Federated's marketing and sales muscle behind it, it is likely to become even better known.
"Today, the Prudent Bear Funds are distributed through a limited number of channels," said Joe Machi, vice president and director of alliances at Federated. "Hopefully, we can expand on that."
There is a danger, however, that Federated is jumping in at the end of a hot trend. Fund companies are notorious for jumping on trends when they are about to end, Mr. Kathman said.
If true, it's a good indicator that the bull market for bear funds is on its way out, he said.
Federated, however, wasn't interested in the Prudent Bear Fund just because it's hot, said Mr. Machi.
"We saw it as an opportunity to complement our existing alternative strategic capabilities," he said.
The deal has been in the works for between eight to nine months, and the fact that it was announced at a time when bear funds are doing well is a coincidence, Mr. Machi said.
David W. Tice & Associates LLC of Denver, the current adviser to Prudent Bear, will cease to exist after the transaction is completed sometime during the fourth quarter, but the management team will stay in place.
MOVING ON
David Tice will no longer be involved in the day-to-day management of the fund, but he said that doesn't indicate any lack of belief in the fund's strategy.
"This does not represent my thinking that the [bear] market is over at all," he said. "We still feel there is a long way to go."
Rather than indicating the end, Federated's actions represent a realization "that we are in a
bear market, and there is a need to offer clients this kind of alternative," said Peter Schiff, president and chief global strategist at Euro Pacific Capital Inc., a broker-dealer in Darien, Conn.
And it doesn't appear that advisers such as Mr. Martin will be cutting back their exposure to bear funds any time soon.
"I cannot build a credible optimistic economic scenario for the next five years that would result in a rising stock market from current levels, so we think a short position is very appropriate, especially for retirees who are making withdrawals from their portfolios," he said.
E-mail David Hoffman at [email protected].
