Bearish stock investors are slowly coming out of hibernation, as money has begun to move into funds that aim to profit when markets dive.
U.S. mutual funds that attempt to profit in falling markets attracted $413 million 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 1%-plus drop in 58 trading days, as the CBOE Volatility Index surged over 44%, noted Bespoke Investment Group.
Frustrating time
The selling pressure in stocks follows a frustrating year-to-date for bearish stock investors, given that the S&P was up 10.5% since Dec. 31 as of Wednesday’s close. Markets were set in negative motion after the U.S. and North Korea exchanged threats. President Donald Trump said Thursday that his previous promise of “fire and fury” in response to any threats from North Korea may have not gone far enough, vowing “trouble” for the country if its actions do not change.
Brad Lamensdorf, portfolio manager for AdvisorShares Ranger Equity Bear ETF, said he has 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 $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 exchange-traded funds have attracted $32 billion this year, including reinvested dividends, according to the Investment Company Institute, a trade group.
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% return this year, according to Lipper data through early August.
“It’s sort of become almost a cliche that this has been the most hated bull market of all time, and I have a hard time buying into that,” said Doug Ramsey, chief investment officer of Leuthold Group LLC, whose firm offers the Grizzly Short Fund.
“We’re only looking for a short-term setback here.”
