Any bears left?
Investors Leave Rydex Bear Funds Despite Stellar Returns
Of DOW JONES NEWSWIRES
NEW YORK -(Dow Jones)- After a mutual fund more than doubles its assets in three months and claims the honor of being the No. 1 fund, you'd think investors would be piling into it.
Not so with Rydex Venture 100 Fund. In fact, investors have been pulling money out of it and other so-called bear funds offered by Rydex Series Funds in the past few weeks since the market reopened after the terrorist attacks despite their fat double-digit returns during the third quarter.
Charles Tennes, director of portfolio at Rydex, of Rockville, Md., says redemptions from these funds, which are designed to move in the opposite direction of their benchmark indexes, are a sign that investors are bracing themselves for a market rebound.
"It shows our own investors understand that having had such a sharp decline, it may be more important to position themselves for a turnaround," Tennes said. "Listening to our customers, even recently, most people thought the stock market was close to a bottom than it was to a top."
Yet, those investors who had invested even a little bit of money in bear funds offered by Rydex and a handful of other fund companies have emerged from the steep selloff of last month less bruised than other investors.
Rydex Venture 100, which seeks to return 200% of the inverse of the Nasdaq 100 Index, soared 117% during the third quarter, ranking at the top of all stock funds Lipper Inc. tracks. The $98 million fund uses techniques of short selling, or selling of borrowed stock with the aim of buying back the securities later a lower price and returning them,
pocketing the difference. It is also leveraged, so that when the market falls, the fund will rise at a greater rate than the decline, and vice versa.
Extremely Risky Position
Tennes notes that the amount of outflows from Venture 100 and Rydex's three other bear stock funds since the market reopened after the Sept. 11 terrorist attacks have been "negligible," and he thinks the flows may turn positive once a large number of investors become aware of their third-quarter performance numbers.
Among its other short funds, Rydex Arktos, also based on the tech-heavy Nasdaq 100 but without leverage, was No. 3 on the Lipper's performance chart with a 52% return, while Rydex Tempest 500, which returns twice the inverse of the Standard & Poor's 500 Index, was up 35%. Rydex offers 32 funds altogether.
Contrary to what people might think, the sales of these funds have historically been strongest during bull markets when investors have extra money to improve the quality of their portfolio management, Tennes said.
At Leuthold Weeden Capital Management of Minneapolis, another company that offers a bear fund, Grizzly Short Fund, has been attracting net inflows since August and the amount of money coming in did increase since the terrorist attacks, "but not hugely," said Paula Diemer, director of institutional client services. As the market started gaining some of the lost ground this week, there were some outflows from the fund.
Tennes cautioned prospective investors not to blindly rush into Rydex's short funds, lured by their stellar short-term results.
It is "extremely risky" to be in a fund that is not only short but leveraged short, he said, because "we all know that in general, the stock market goes up a lot more than it goes down."
Investors don't need to look beyond what Venture 100 did this week to know how quickly funds like that would roll down the hill once a sustained recovery starts: It was the bottom performer of all funds with a decline of 19% in the week ended Thursday when stock funds climbed 5.4% on average, according to Lipper.
Powerful Hedging Tool
Tennes says funds like Venture 100 are best used as a hedging tool in combination with other funds to reduce the volatility of investors' overall portfolios.
For example, Rydex sometimes advises a customer to hold its Nova Fund, a leveraged long fund designed to produce 150% of the performance of the S&P 500 Index, as a core investment and put the equivalent of 10% to 15% of that investment in Venture 100 to hedge the portfolio. By doing so, investors will have exposure to a broad range of companies that make up the S&P 500 but are hedged against volatility in technology stocks among them.
Tennes coincides that the strong performance of its bear funds isn't all bad for Rydex. It should bring investors' attention to these funds and help them realize they can be very efficient and powerful tools during market downturns, he says.
"I think there are a lot of people who are maybe a little bit unnecessarily frightened of leverage and simply not look at them," Tennes said.
-By Yuka Hayashi, Dow Jones Newswires, 201-938-2129
yuka.hayashi@dowjones.com |
