It’s easy to understand why investors are piling into Bear Market funds.

Consider that the Direxion NASDAQ-100 Bear 2.5X Inverse Fund is up 35% year to date. It is designed to produce 2.5 times the inverse of the Nasdaq 100’s daily return. What most investors probably don’t know is that last year it tanked 36%.

This is a prime example of the volatility of these funds -- they can go down as quickly as they go up.

Historically, the stock market has gone up more often than it has gone down. So, while the funds may outperform in the short term, they don’t usually do well over long periods of time. That’s why financial planners say one of the most common mistakes investors make is holding bear market funds too long.

Another mistake is buying at the bottom of the market, when sentiment is most bearish, only to see the market quickly recover.

So, under what circumstances do Bear Market funds make sense?

Financial planners say they’re useful as an “insurance policy.” Let’s say you have racked up significant paper profits in an S&P500 index fund. If you “cash out”-- and sell your entire position -- you will have to pay capital gains on the total profit. Instead, you could sell less of your index fund and buy a leveraged Inverse S&P500 fund. That would put some money in your pocket and assure the rest is protected from a major market downturn.

Do you have a “hedging” strategy? Would you consider buying any type of Bear Market fund?