Fact Check: BetaShares Australian Equities Bear Hedge

Having launched back in July 2012, this ETF provides investors with a way to profit from or protect against a decline in the Australian stockmarket, making it ideal for uncertain and volatile times like this. It seeks to generate returns that are negatively correlated to the returns of the Australian stockmarket.

The fund was one of the few in the Australian equity sector that was managing to achieve positive returns year to date at a time when most others were reporting falls of around 20%-30%. Out of the 289 funds in FE Analytics Australian Core Strategies Australian equities sector, 32 funds lost 30% or more over the last three months.

For reference, the ASX 200 index had lost 26% since the start of 2020 as global stockmarkets tumbled in light of the economic shutdown caused by COVID-19.

Since the start of the year to 27 March, the $104 million BetaShares BEAR fund has returned 20% versus losses by the ASX 200 of 26% over the same period, according to FE Analytics.

It invests in cash and cash equivalents and sells equity index futures contracts in order to generate a positive return when the ASX 200 index declines. Conversely, it will produce a negative return when the index increases. 

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Looking over the longer term, it had returned 7.7% versus losses by the ASX 200 of 17% over one year but over three years, it had returned in line with the index with losses of 4.2%.

Alex Vynokur, chief executive of BetaShares, said the fund was built to return a gain of 0.9%-1.1% for every 1% fall by the index. 

In its product disclosure document (PDS), it said the benefits of using this type of fund, unlike other typical managed funds, were it gave simple access to short exposure, had no margin calls for investors, was liquid and transparent. 

Vynokur said: “Advisers see this as a form of insurance policy, a way they can protect against equity losses. The fund allows 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 well as this, BetaShares runs an Australian Equities Strong Bear Hedge fund, which sat in the ACS Australian geared equity sector, and was positioned to return 2.1%-2.7% for every 1% fall by the index. 

HOW TO USE IT IN A PORTFOLIO

Vynokur said the amount allocated to this fund would depend on investors’ existing portfolio as it was important, particularly in times of market stress, to make sure portfolios were sufficiently diverse. 

“Some people have already been diversifying their portfolios so they would need less whereas others might want to have a more meaningful hedge in place,” he said.

According to its PDS, the ETF could be used to: 

• Hedge portfolios against falling markets;
• Seek profits when markets decline;
• As an alternative to using futures, swaps or derivatives;
• Obtain short exposure instead of selling equities; and
• Pairs trading (going long the fund and long an individual stock to seek to reduce the impact of market movement on stock’s performance.)

BetaShares said it was particularly popular at the moment, reporting inflows that were 25-30 times higher than usual volumes in the same period last year.

However, it was not without risk, with the biggest being associated with negatively correlated returns as, given the historically strong returns by the ASX 200, investors would typically experience a loss rather than a gain. Over five years to the end of 2019, the ASX 200 had returned 62%. 

The PDS said: “This result is the opposite of most other managed funds. Investors should note in the past that the broader Australian share market, as measured by the ASX 200, has generally tended to increase over the long term. This would mean had the fund been in existence over that period, the value of the units may have tended to fall.

“The responsible entity will seek to achieve the fund’s investment objective, of seeking to provide returns that are negatively correlated to the returns of the broad Australian share market in all market conditions. This means, that, in a rising share market, investors should not expected the fund’s investments to be repositioned in positively-correlated assets to attempt to profit from a rising share market.”