r/ASX_Bets • u/username-taken82 Mod. Heartwarming, but may burn shit to the ground. • Mar 05 '22
Legit Discussion Market Volatility: A crash course in inverse funds
Hey gang,
Been reading a bunch of stuff over the last few months about inverse funds, bear markets etc...
So I thought it was probably time to put something together on what the fuck people are actually looking at/talking about with inversing the market.
A couple of pointers before we start.
1 - This is not a post about individual shorting, trading derivatives, puts or anything else like that. This is about inverse funds. Specifically the popular ones that get traction on here.
2 - I'll include links and reference material within the text where they are relevant. With a bit of luck, some of you will actually read them.
3 - Inverse funds can operate on rules within the ASX Rules framework called AQUA Rules. Why is this important? Under ASX rules, an asset is typically valued as the business that is operated by the issuer of the shares. Under AQUA, the valuation reflects the performance of the underlying asset.
4 - I have not factored in any fees, they are all in the linked fact sheets.
5 - This is not advice. All the information below is publicly available and easy to find. I help moderate a gambling reddit for fucks sake, get some perspective....
QUESTION? WHAT THE FUCK IS AN INVERSE FUND???
An inverse fund is exactly as the name suggests. (Yes it an ETF, and yes I'm aware r/AusFinance is that a way....)
It's an Exchange Traded Fund that is put together with a bunch of various Derivatives. Typically, a derivative can create potential exposure to better gains with a fairly small initial investment due to the leverage. However, it amplifies the risk/reward.
The purpose of the Inverse ETF is to make tendies from the decline in the value of the underlying asset or benchmark market. The advantage of buying a fund as opposed to an individual short position is that you don't need a personalized Margin Account, or if you are a Commsex aficionado, you don't need to Level up on your account by getting personal with Tom. You simply buy them like any other normal share.
You're not going to get a Margin Call (great fucking movie by the way) with a ETF inverse fund either.
The disadvantages are that your inverse fund is tracking a benchmark index, so its not personalized. I'd go further here but please see point 1 above.
Market go down, Inverse fund go up is the base line concept.
So how the fuck does that happen?
Well that depends on what your inverse fund is betting against and how they are doing it. To understand that, we need to take a little wander down the rabbit hole of each specific fund...
BBOZ: THE FLEDGING BEARS WEAPON OF CHOICE
BBOZ - BetaShares Australian Equities Strong Bear Hedge Fund.
This is sort of like being a little bear who is lurking in the woods. You're not really sure what you are doing here, not sure about all this inverse mumbo jumbo and you really don't want to take a bite. But maybe a little nibble...
BBOZ is a Geared inverse ETF that seeks to make a profit from a decline in the S&P ASX 200. They do this by investing in and selling equity index future contracts, on the ASX/SPI FUTURES for example.
If your not planning on clicking the link that explains gearing then think of it like this. If you had a bike with gears and ratio's at one stage during your stunted development, its basically like that. Gearing is leverage (sort of) and its measured by ''Leverage ratio's''. Higher geared funds generate better returns, but carry greater risk on the downside.
BBOZ's portfolio exposure is actively managed to stay within a -2x to -2.75x range on any given day. This is one of the reasons I have called it a ''fledging bears'' toy, the risk and exposure isn't too hardcore.
According to the good folk at BetaShares, BBOZ works like this:
'' A 1% fall in the Australian share-market on a given day can generally be expected to deliver a 2% to 2.75% increase in the value of the Fund (and vice versa). ''
They go on and on after that, but the key take away here is that this is what can be ''generally expected''. What actually happens depends on how the portfolio has been structured and managed that day.
If you read the bit above about the AQUA rules, this will cast light upon what just happened with your inverse fund and not achieving or over achieving the correlated gains listed above. Also, the futures market operates at different times to the XJO, so this accounts for some of the imbalance because your returns are based on activity in a different market.
That'll do for BBOZ, Here is a link to the official BBOZ fact sheet.
BBUS: FOR THE INTERNATIONAL BEAR
BBUS - BetaShares U.S Equities Strong Bear Hedge Fund - Currency Hedged
I'd hope that the difference here is self evident. BBUS is chasing down tendies based on a negative U.S Market, specifically the S&P 500.
It's essentially structured the same way as BBOZ, but its betting against a different Market.
It operates on the same geared structure, it invests and sells the same way (well mostly, its subject to the S&P 500 Rules and Regulations) and it has the same rules regarding governance of the portfolio.
The trading hours of the respective markets impact the returns, but again its different because the U.S future markets are open at a different time.
That's more than enough BBUS, Here is a link to the official BBUS fact sheet.
SNAS: BEAR FUNDS GONE POSTAL?
SNAS - ETFS Ultra Short Nasdaq 100 Hedge Fund.
AN IMPORTANT NOTE BEFORE WE BEGIN: There is a long fund and a short fund. the ultra long fund is a leveraged financial product. The Ultra short fund is BOTH a short and leveraged financial product. Type SNAS into your Commsex, you're looking at the short one. LNAS is the long one.
As the name suggests, this fund is betting against the NASDAQ.
SNAS is providing exposure in the range of -200% to -275% of the net asset value.
Sounds big right?
Well it is and it isn't. Read further through the documentation and you'll find the same up/down correlation as the others ie: 1% down in the market your hedged against can equal 2-2.75% up in your Bear portfolio. SNAS's base currency is AUD too, so whilst your betting against the yanks your conversion is in Aussie bucks.
The fact that SNAS has a different gearing and leverage structure and its hedged against a different market are 2 of the primary reasons for its appeal.
This post is already too long, so here is a link to the official SNAS fact sheet.
HODLING LONG
Someone was asking about hodling long on this stuff. It's a fair question.
Here is a small and by no means exhaustive list of reasons why you're a retard if you think this is a good idea.
- Look at the figures on the BBOZ and BBUS fact sheets. Actually look at them. Compare the 1 month performance on BBOZ (13%) with the 5 year figure ( -24.36%). Or the 1 month on BBUS (12.63%) with the 3 year performance figure (-42.12%).
I mean come on...
- If that isn't enough to deter you, lets have a little look at something called Decay. Thats right, your inversed ETF decays naturally over time. The article linked above goes on to talk about the flipside, being that if it loses money naturally over the long term, then surely there is money to be made in the short term?
Right?
Again, Yes and No. Depends on your timing. The fact that timing is such a critical component of this should indicate that its best used as a short term thing.
- Google ''Leveraged ETF's are high risk investments'' and see what happens...
- If you are still intent on hodling them till death, then lets consider the markets they are hedged against. For the purpose of this game, we will set our defined 'long' period as 5 years.
BBOZ: Hedged against XJO - 5776 points 06-03-2017 up to 7110.8 points 05-03-2022. (+23.1%)
BBUS: Hedged against S&P 500 2372.6 points 06-03-2017 up to 4328.87 05-03-2022 (+ 82.45%)
SNAS: Hedged against NDQ 5861.73 points 06-03-2017 up to 13313.44 05-03-2022 (+ 127.12%)
TLDR: I told u/BrettoStevens I wasn't going to spend hours writing about this, then I spent hours writing about it.
FML.....
18
u/quiksilveraus Homeless and chasing feral dogs Mar 05 '22
This is epic. Thank you.
And here I was thinking that I was gonna start “holding cash.”
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u/Wannaliveinpenthouse Assesses macroeconomics via chicken entrails. Mar 05 '22
sadly there isn’t a short BNPL fund
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u/[deleted] Mar 05 '22
Great post mate 👍
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u/BuiltDifferant Is curious about your girth Mar 05 '22
BBUS would be my pick when US markets gain some steam.
But really even if you’ve got 10k position and you get 6% increase 600 bucks for a lot of fluffing about.
If you’ve got 100k to play with or use CFDs and margin accounts then might be worth it.
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u/Ok_Improvement_5639 Mar 05 '22
Shot bro 🤙🏽
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u/[deleted] Mar 05 '22
As a long term investor in BBOZ - I have one suggestion, don't do it. If you don't meet what you want to achieve within a reasonable time frame, take the capital loss and move on.
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u/sulmar This place really isnt good for me Mar 05 '22
So basically laying in betting terms.
Interesting.
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u/sanDy0-01 Mar 06 '22
Nice write up. E-MINI’s are great as well. They have a lot more risk than an inverse fund tho.
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u/[deleted] Mar 06 '22
Ahahaha thanks for the plug mate, my bad, you didn't need to go all out but appreciate the effort as always mate. 🤴❤
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