Funds for a Bear Market
Although we’ve focused mostly on ETFs here, quite a few mutual funds are designed to do well in bear markets. Most of them are index funds, such as Rydex Inverse S&P 500 2x Strategy RYTPX which returns twice the inverse of the S&P 500 return each day. RYTPX gained 94% over the year ending March 1, and Rydex Inverse Dow 2x Strategy RYCWX showed a similar gain.
Over a dozen of these index funds were up more than 50% for the year and almost all the bear market stock funds are showing double-digit gains over the same period. Such funds are extremely volatile as are the similar bear-oriented ETFs. A one- or two-day bear rally can trigger huge losses, and a sudden market turnaround could be catastrophic. This is why they’re best used as a hedge in a portfolio of other investments.
Another possibility, however, are bear-oriented mutual funds that are actively managed (as most mutual funds are, though most aren’t geared to bear markets). Two possibilities are Federated Prudent Bear BEARX and Grizzly Short GRZZX.
BEARX uses short sales when the price of a stock is expected to decline. It may hold more “short” equity positions than “long” equity positions and can also purchase restricted securities in private placement transactions, exchange-traded funds (ETFs), and hybrid and derivative instruments. Former pwner-manager, David Tice actually warned of the credit crisis years before it occurred. His co-manager, Doug Noland took over after Tice sold his company to Federated, but the fund’s strategy remains the same. Noland’s market commentary can be found at www.prudentbear.com and he has been widely quoted as a critic of Greenspan’s policies.
GRZZX also engaged in short selling, using only actively traded, highly liquid stocks with a market cap of $1.5 billion are selected. Typically it has 45 to 70 such stocks. Manager Steven Leuthold uses a proprietary Vulnerability Index. to find stocks, which are selected from actively traded, highly liquid stocks with a market cap of $1.5 billion. Interviewed in August of 2008, he pegged the beginning of the recession as near the end of 2007. He projected that the economy would show “some positive signs sometime in the first half of 2009.” His commentaries are widely quoted on the Internet.
The 10-year performance of both funds is up over 10%, while GRZZX has a one-year performance of over 78% and BEARX is up over 33%, as of March 26. When comparing the two, consider such factors as the load. For example, if purchased through Fidelity investments, BEARX has a load of 5.5%, while GRZZX is a no-load, but carries a redemption fee if the fund is held less than 180 days.
Do your own due diligence. A good site for researching mutual funds is www.morningstar.com.