"Of Mutual Interest," -Tracking Bear Market Funds
Tuesday, April 15, 2008SUZANNE PRATT: So far this year, bear market funds are the best performing mutual fund category -- up over 9 percent. It may be tempting to chase those returns, but as Erika Miller explains in tonight's "Of Mutual Interest," the funds aren't recommended for most investors.
ERIKA MILLER, NBR CORRESPONDENT: With all the worries about recession, the credit crunch, and the housing market, it's no surprise that investors are nervous, and many are buying bear market funds. Those funds are dominating the list of top performing mutual funds so far this year.
They have different strategies, but all seek to do well when the stock market is down.
The vast majority are passively managed, designed to move in the opposite direction of a particular market benchmark. For example, if the S&P 500 falls 1 percent, an inverse S&P 500 fund should gain 1 percent.
Some funds also use financial leverage to magnify both gains and losses. Steve Sachs is director of trading at Rydex Investments, which introduced the first inverse index mutual fund 14 years ago. He says, nowadays, most of them use complex investment tools.
STEVE SACHS, DIRECTOR OF TRADING, RYDEX: The portfolio is designed and uses instruments that effectively increase in value when the market declines. And those instruments are generally futures contracts, derivatives contracts, such as swaps or options, and there is some shorting that takes place.
MILLER: David Tice runs one of the few actively managed bear market funds, the Prudent Bear. Unlike most of the others, he also tries to eke out gains in bull markets. Over the past five years, the Prudent Bear fund has returned an average of 1.5 percent a year. That compares to almost 12 percent for the S&P 500.
Morningstar analyst David Kathman says Prudent Bear uses an unusual investment strategy.
DAVID KATHMAN, MUTUAL FUND ANALYST, MORNINGSTAR: He shorts certain indexes like the S&P 500, but he also shorts individual stocks that he thinks are particularly overvalued. But he also has long positions in things like gold stocks, and that has actually helped him lately, when gold has been rising.
MILLER: Experts say bear funds are often used by sophisticated investors, who are trying to time the market or hedge risk.
SACHS: They think that there's a decline coming in U.S. markets or they've got gains they just want to protect. They don't want to sell those particular investments for whatever reason -- typically, it's tax reasons - - so they can purchase an inverse fund to hedge against that.
MILLER: But mutual fund analysts advise average investors to be extremely careful about buying these funds.
KATHMAN: Use it as a hedge, use it in the right way, like they're intended to be used, and not trying -- as a market call, trying to time the market, because you're certain to get burned.
MILLER: Bear market funds don't just hedge against U.S. stocks these days. You can also find funds that inversely track foreign markets, bonds, oil, currencies, even precious metals.
Erika Miller, Nightly Business Report, New York.
