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|Share Classes||Product Type||Asset Class||Category|
|C IS||Mutual Fund||Alternative and Objective-Based||Bear Market|
For the fourth quarter of 2016, the Standard & Poor’s 500 Index (S&P 500) returned 3.8%, including dividends. The Russell 2000 Index returned 8.8% in the fourth quarter and the Nasdaq Composite returned 1.7%. During the quarter, Financials and Industrials stocks were the best performers from a sector perspective, while Real Estate and Health Care were the weakest.
In the fourth quarter of 2016, financial markets were significantly impacted by the U.S. presidential and congressional elections. The surprise victory by president-elect Trump, as well as Republican victories in the House of Representatives and Senate, was viewed favorably by market participants. The quarter, at times, saw heightened volatility. Volatility as measured by the CBOE SPX Volatility Index (VIX) began the fourth quarter at 13, increased to 23 in early November due to the U.S. elections, and ended the fourth quarter at 14.
Bond markets were exceptionally volatile following the election due to the presumption that the president-elect would prefer leadership changes at the U.S. Federal Reserve. U.S. 10‑year Treasury bond yields increased significantly in the fourth quarter, with yields rising from 1.59% to 2.45% at quarter end.
The U.S. dollar strengthened markedly in the fourth quarter, increasing 7.1% as measured by the U.S. Dollar Index (DXY). Gold declined sharply by 12.8% in the fourth quarter. Brent crude oil rose 15.8 % in the fourth quarter and natural gas increased 28.2%.
In the alternative investment sectors, the Alerian Master Limited Partnership Index (AMZ) increased 2.0% in the fourth quarter, while the MSCI U.S. REIT Index (RMZ) decreased 3.0%.
Federated Prudent Bear Fund’s fourth quarter 2016 return was -5.02% (A Shares at NAV). The fund managers varied net short exposure throughout the quarter, ranging from a high of 73% to a low of 60%. Throughout the fourth quarter, the gross short position decreased to 104% from 135% and the gross long position decreased to 30% from 72%.
Performance quoted represents past performance, which is no guarantee of future results. Investment return and principal value will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than what is stated. Other share classes may have experienced different returns than the share class presented. To view performance current to the most recent month-end and for after tax returns, click on the Performance tab. Performance does not reflect the maximum 5.5% sales charge for A Shares. If included, it would reduce the performance quoted.
Click the Performance tab for standard fund performance.
The fund’s performance in the fourth quarter was helped the most by long positions in the Financials and Information Technology sectors and by short positions in the Financials and Consumer Staples sectors.
The fund’s performance in the fourth quarter was hurt the most by long positions in the Telecom and Health Care sectors and by short positions in the Information Technology and Consumer Discretionary sectors.
The fund managers continued to own mostly dividend-paying equity securities in businesses that we believe are relatively stable and whose stocks have historically shown resilience in times of market stress and to sell short equity securities that we believe trade at higher prices than are warranted.
Positioning and Strategy
The fund managers commenced the reporting period positioned with net short exposure at 63% and closed the fourth quarter with net short exposure at 74%.
During the fourth quarter, individual company, sector and non-S&P 500 Index shorts were decreased from approximately 63% to approximately 36%. At the end of the quarter, S&P 500 short positions represented roughly 68% of fund exposure.