Tough times in financial markets aren’t usually the best tonic for fund companies. But a growing family of index and exchange-traded funds sponsored by BetaPro Management Inc. of Toronto has been getting a boost from the rocky markets.
The company’s Horizon BetaPro ETFs and index funds allow investors to double the daily returns of a variety of indices, commodities or baskets of stocks, from broad market averages to narrow niches such as gold and grains. The funds also come in bear versions that rise by double the amount of the daily loss in the underlying investment. By offering both magnified increased and decreased returns, or simply providing exposure to a market with half the capital normally required, HBP Bear Plus or Bull Plus funds can be used by clients to protect and enhance returns.
“We’re seeing a lot of downside volatility in the market, and these conditions have fuelled demand for our bear products particularly,” says BetaPro president Howard Atkinson. “For people who are bearish, there are not a lot of other convenient alternatives in the marketplace. At the same time, there’s been growing willingness on the part of investors to embrace ETFs generally.”
BetaPro’s growth rate has been rapid, with assets under management soaring to about $1.2 billion from roughly $100 million in January 2007. Largely because of BetaPro’s success, Atkinson, along with BetaPro chief executive officer Adam Felesky, have been promoted to new positions at an associated company, JovFunds Management Inc. of Toronto. In March, Atkinson became managing partner of JovFunds Management and president of its sales and distribution subsidiary JovFunds Inc. At the same time, Felesky became chief investment officer of JovFunds Management. The JovFund companies are wholly owned by multi-tentacled financial firm Jovian Capital Corp. , which also owns 40% of BetaPro. Both Atkinson and Felesky are continuing to work their magic in their current positions at BetaPro. (For more on Jovian, see page 46.)
Atkinson says that the current asset mix at BetaPro is 60% bear products, and 40% bull products. The lineup includes 15 mutual funds, which are sold and redeemed daily based on net asset value, as well as 18 ETFs that trade on the Toronto Stock Exchange on an intraday basis. The mutual funds have management expense ratios of 2.5% for the regular funds and 2% for F Class, based on the actual capital invested, not the 200% exposure provided by the funds. The ETFs are more economical with MERs of 1.15%.
“Because our users tend to favour the ETFs, that’s where we’re seeing the most growth,” Atkinson says. “We’re the only ones in Canada offering built-in leverage or inverse leverage on ETFs.”
In addition, 16 of the 18 BetaPro ETFs have exclusive agreements with the providers of the underlying indices that determine the funds’ returns, and this serves as a barrier to others who might want to offer similar ETFs, Atkinson says.
BetaPro’s bull and bear products offer returns tied to a variety of benchmarks, including the broad S&P/TSX 60 index as well as specific stock sectors like financials, energy, gold and global mining. There are also products tied to Nasdaq stocks, Canadian bonds, and the U.S. dollar, and to commodities such as gold, natural gas, crude oil and agricultural grains.
“The problem faced by many fund management companies is that an area will get hot, such as agricultural products, and there will be a plethora of products coming out at the top of the market when the values are much less attractive,” Atkinson says. “We escape that by having both bull and bear versions of our funds. Investors can switch from one to the other as conditions change. On any given day, half our products will be up and half will be down, providing there is some movement in the underlying benchmark that returns are tied to.”
For the year ended Mar. 31, the HBP S&P/TSX 60 Bull Plus A Fund showed a gain of 1%, based on double the daily gains of the index. The Bear Plus version lost 11.7% during the same period. However, the tables turned during the bearish market of the last six months. For the six-month period the HBP S&P/TSX 60 Bull Plus lost 10.8% and HBP Bear Plus gained 6%. More dramatic was the HBP NYMEX Oil Bear Plus A Fund, which lost 69% for the one-year period, while the Bull Plus version gained 86%. Atkinson says most of the action in the ETFs is short-term trading, with the average holding period typically ranging from four to 10 days.
@page_break@“Some people put on a hedge for a week or so, then lift it when market conditions or their portfolio strategies change,” he says.
Dan Hallett, president of Dan Hallett & Associates Inc. in Windsor, Ont., says the Betapro funds are attractive for clients with a strong view on the direction of markets or a particular sector.
“With the Betapro funds, not only can investors go short, they can get leveraged returns. The problem is that people often get market direction wrong,” Hallett says.
Additional HBP products will be added in time, Atkinson says, with possibilities including funds tied to technology stocks, international stocks, currencies, commodities or Canadian small caps. Atkinson stresses that the underlying securities making up the index or benchmark on which HBP funds are based need to be liquid to create an effective product. Certain sectors that might otherwise be in demand are therefore excluded from the lineup, such as funds based on uranium stocks or the TSX Venture Exchange.
Regular mutual funds must implement measures to discourage active traders and market timing, but because the HBP funds are regulated as commodity pools clients can move in and out as they wish. Clients may bet on the markets and take advantage of trends, in addition to hedging existing portfolio positions.
One of the attractions of the HBP Bear Plus funds is that they eliminate some of the risks of other bear market strategies such as short selling. Although investors who short stocks in the regular fashion face margin calls and the possibility of unlimited losses if the market goes against them, HBP investor losses are limited to the amount of capital they put up. Furthermore, any gains made from the bear units are taxed as capital gains, unlike short selling, where profits are taxed as regular income.
The HBP funds that focus on pure commodities offer clients a way to get commodity exposure without having to dabble in highly leveraged futures markets.
Here are some ways in which HBP funds can be used in different kinds of markets:
> When Markets Are Rising. If your clients are optimistic about the stock market overall or a particular sector, they can receive 200% exposure to a chosen index, sector or commodity through HBP Bull Plus Funds.
> Hedging To Reduce Volatility. Clients may be comfortable with their long-term equity holdings but during volatile times could reduce volatility by putting 10% of equity assets in a HBP Bear Plus, thereby receiving 20% short exposure.
> Sector Exposure. A particular sector such as financials or golds may look worrisome to clients in the short term, but they may like the long-term prospects and the dividends. Rather than selling during a temporarily difficult period and triggering capital gains for the client, HBP Bear Plus funds allow clients to benefit while particular sectors are in a temporary downturn.
> When Stocks And Commodity Prices Are Out Of Sync. A client may be bullish on the price for gold bullion, but may think gold stocks are overvalued. He or she could gain extra exposure to the commodity through HBP’s COMEX Gold Bullion Bull Plus, and yet benefit from a drop in gold stocks through the S&P/TSX Global Gold Bear Plus ETF.
Alternatively, the client may choose to have long exposure to some favourite gold companies, but hedge against a drop in the sector with HBP. If the selected stocks dropped 3%, and the TSX global gold mining index dropped 5%, the HBP S&P/TSX Global Gold Bear Plus ETF would actually rise 10%, resulting in an overall gain for the client. Even if half as much was invested in the HBP units, the client would still make money because of the 200% inverse exposure.
> Half-Price Exposure. Because of the 200% exposure, clients can achieve their desired equity exposure with half the capital, freeing up the other half for a complementary strategy that could reduce risk. For example, clients could put half their capital in HBP’s S&P/TSX 60 Bull Plus, and with the other half buy an asset with low or no correlation to Canadian stocks, such as a real estate investment trust or a hedge fund. IE
Betting on a change in the direction of markets
Bull and bear versions of BetaPro’s funds offer magnified returns based on gains or losses of a number of indices
- By: Jade Hemeon
- April 25, 2008 October 30, 2019
- 15:01