Bear funds are mutual funds which are designed to perform well in a bear market, placing them in opposition to most other mutual funds, which simply ride out market downturns, rather than trying to actively profit from them. Interest in bear funds tends to increase every time the market experiences a downturn, but investors have to think carefully before putting money in such funds, because they can be very risky. Finance experts do not, for example, recommend putting the bulk of one's capital into a mix of bear funds, as this can have catastrophic results.
These funds may be managed passively through a technique called indexing, or actively, in which case employees of the fund track and analyze market trends to determine the best possible moves. Bear funds often take advantage of somewhat risky investment strategies like selling short, using leverage, and employing put options. These techniques require skill from the manager of the fund and the staff, as it is easy to go wrong with such tactics. More conservative bear funds simply focus on investing in stocks that always perform well, avoiding the risk of more adventurous strategies.
For bear funds, bad news for the market is good news, because the fund can increase in value. If the fund is managed well, investors may be able to reap a substantial return when the market trends downwards. If the fund is not properly administered, however, the performance can be lackluster, and it may be safer to invest in more conventional types of mutual funds. These types of funds also do not usually perform well in the long term, being better suited to short term investment.
For investors who are interested in bear funds, the recommendation is usually to invest some funds this way, but to make sure that investments are diversified across different types of funds and other investment instruments as well. The idea is that the gains from the bear funds can offset losses from other investments, keeping a portfolio lower in risk, and that if losses are experienced in the bear fund, other investments will balance these losses out.
Prudent Bear and Grizzly Short are two examples of well known bear funds which have established performance records. When deciding to invest in any mutual fund, investors should do their research, finding out what kinds of returns those funds generate. It can help to talk to an investment advisor with experience in the industry to determine how to allocate investments effectively. Investment advisors can be especially valuable in a volatile market, as they may have experience and foresight with which to guide their clients effectively.
