This section briefly details the necessity and functions of the bear market fund. These will be explained with some examples. The activities of the bear market are completely opposite to that of a market with indexes such as Nasdaq 100.
A bear market fund is operated in exactly the opposite manner compared to market activities. That is, if the market falls then, the bear market funds will rise. Here, the term “market” signifies some indexes like, Nasdaq 100, the S&P 500 etc.
Some examples of bear market funds are the ProFunds UltraShort, Japan, Direxion High Yield Bear, ProFunds Short Oil & Gas etc. Bear funds normally collect their returns from “short-selling index futures” then a security holder may borrow an issue and wait for the price fall.When this happens, the holder earns a profit. It has a down side as well.
Should the price increase, the holder will obviously incur a loss. An index future keeps the track record of an index and is a kind of financial derivative but, it can also be traded like a traditional stock.
A bear market fund may get the inverse of a given index’s returns by short-selling it. That is, if an index decreases by 1% on a particular day, then the bear fund associated with that index will be increased by 1%, and it is true conversely as well.
Some bear market funds borrows assets to buy more shares so that it can return at least twice the inverse of the index chosen by the investors. Therefore, it amplifies both the downside returns and potential upside.
One example is the “Rydex Inverse S&P 500 2x Strategy”. It is designed in such a way that it may double the S&P 500’s return every day. That is, S&P 500 incur 2% loss then the bear market fund will gain 4%.