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A Guide to Investing in Bear Market Funds


Due to trade war fears, policy uncertainty and a host of other factors, investors are leery about what the future holds for the stock market. But certain funds are designed to bet against the market or weather a bear market. Read on to discover how bear market funds work and if they can protect your portfolio.

A financial advisor can give you valuable insights and guidance in picking the types of funds that fit your goals, risk profile and timeline.

What Is a Bear Market Fund?

Some investors choose to shift some of their portfolios into fixed-income securities to weather a bear market. However, others resort to a more aggressive approach to capitalize on the profits from the downturn. These investors may invest in a bear market fund to maximize their profits.

Bear market funds are designed to profit when there is a market downturn. To accomplish this, bear market funds often invest in short positions and derivatives. This allows investor returns to move in the opposite direction of benchmark indices. For example, during the 2008 financial crisis, some bear market funds had returns reaching 37%. Moreover, the S&P 500’s return dipped 37%, which was the complete inverse return.

Popular Bear Market Funds

Investors use bear market mutual funds to profit during market downturns. These funds may invest in a variety of assets, such as gold, cash, and treasuries. These funds may also invest in short positions. Some of these short positions will use leverage to place steeper bets, while others don’t short stocks at all and use a combination of other alternative investments. Some of the most popular bear market funds are as follows:

PIMCO StocksPLUS Short Institutional

This fund achieves its investment objectives by mostly investing in short positions or specific index securities. This fund is backed by a portfolio of fixed-income securities including bonds, debt securities, and similar investment vehicles that are issued by both U.S. and international entities.

Federated Prudent Bear A

This fund is also primarily invested in short positions but focuses on domestically traded equity securities and indices. It has many short-term liquid securities such as money market funds, U.S. Treasury securities, government agency securities, and other liquid securities. This helps cover its obligation to purchase securities that are subject to short sales in the future. This fund also focuses on appreciation through a mix of long positions on equity securities that are thought to be undervalued.

Grizzly Short 

The fund sells stocks short. This means that they sell borrowed securities. When the fund sells a stock short, it must replace the stock borrowed at the same price that it sells for to the securities lender. This approach is disciplined and unemotional as it uses a quantitative investment approach. It should be noted that this fund will generally have between 60 and 100 stocks that it has sold short.

Rydex Inverse S&P 500 Strategy Inv

The fund uses a system of short selling securities included in derivative investments. The fund manager will invest at least 80% of its net assets plus any borrowings for investment purposes. This fund is non-diversified and will lean heavily on the securities of companies in the underlying index.

Gotham Short Strategies Institutional 

This fund aims to grow by investing under normal circumstances in both long and short positions of equity and equity-related securities. This fund invests in companies of any size. It generally takes long positions when the account’s advisor considers securities undervalued. They also take short positions on securities that the advisor considers overvalued.

Other Bear Market Investment Strategies

bear market fundsWhen stocks begin to fall, it is difficult to predict how much the dip will be or how long it will last. If you wait too long to invest, you won’t profit from the bounce back on stock prices, but if you invest too soon, your investments may follow the market down. Here are a few other ways that you may want to investigate to diversify your investment strategies.

Identify Assets that Increase in Price

You may want to research past bear markets to see which stocks, sectors, or assets increased in price or maintained their standing when the rest of the market was falling. For example, food and personal care items typically maintain their performance during a down market, and precious metals often outperform the market. You may want to allocate some of your cash in these sectors to spread out your risk.

Be Patient With a 401(k)

When the U.S. experienced a bear market in 2007-2009, many people reported that their 401(k) plummeted in value. However, all the shares purchased as the market descended became far more profitable when the market rebounded. In the half-decade following the recession, many people’s 401(k)s were far more profitable than they were in 2006-2007’s market peak. Most advisors recommend investing small amounts at regular intervals in this strategy rather than throwing in lot of money at once.

Purchase Short and Long Put Options

Purchasing inexpensive short and long-term put options on the major indices is another possibility. A put is an option that represents 100 shares and has a fixed time length before it expires and has a specific selling price. If you buy put options on Dow Jones, for example, your puts will gain in value as the index falls. These options increase or decrease in value by a much larger percentage than stocks, so even a small number of puts can help offset your long-position losses.

The Bottom Line

bear market fundsBear markets are usually signs of rough financial times. If you’re seeking protection from this kind of trend, you could consider investing a bear market fund to weather the storm.

However, remember that all bear markets end at some point. You’ll have to decide whether it’s better to exit the market to try to make a quick buck or stick around until conditions improve and a larger gain is possible. Some of the savviest investors advise holding onto your assets in a downturn or even buying more stocks while you can get them for a discount.

Investing Tips

  • Worried about a bear market affecting your portfolio? You may want to consider consulting a financial advisor. If you don’t have a financial advisor yet, finding one doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
    Do you have the risk tolerance to weather a bear market? Do you worry about taxes and inflation diminishing your investment? Any idea how your investment will grow over time? SmartAsset’s investing guide can help you find the answers to initial investment questions.

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