Bear Funds: -
October 8, 2001
Rydex Bear Fund Rises,
But Investors Withdraw
By YUKA HAYASHI
Dow Jones Newswires
After a mutual fund climbs more than 100% in three months and claims the honor of being the third quarter's best-performing fund, you would think investors would pile into it.
Not so with Rydex Venture 100 Fund. In fact, investors have been pulling small amounts of money out of it and other so-called bear funds offered by Rydex Series Funds since the market reopened after the terrorist attacks Sept. 11.
Charles Tennes, senior vice president at Rydex, Rockville, Md., says redemptions from these funds, which are designed to move in the opposite direction from the market, are a sign investors are preparing 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," Mr. Tennes said. "Listening to our customers, even recently, most people thought the stock market was closer to a bottom than it was to a top."
Yet those investors who had even a little money in bear funds offered by Rydex and a handful of other fund companies during last month's steep selloff have done well for themselves. Rydex Venture 100, which seeks to return 200% of the inverse of the Nasdaq 100 Index, soared 116.98% during the third quarter, putting it at the top of all stock funds Lipper Inc. tracks.
The fund, with $98 million in assets, profits in a down market by short selling, which involves the selling of borrowed securities with the aim of buying them back later at a lower price. The Rydex Venture 100 also is leveraged, meaning it rises more than its benchmark when the market goes down and sinks more when the market goes up.
Mr. Tennes says the amount of money withdrawn from Venture 100 and Rydex's three other bear stock funds after the Sept. 11 terrorist attacks has been "negligible." He thinks the withdrawals may turn into new money going into the funds once 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 which doesn't use leverage, was No. 3 on Lipper's quarterly performance list with a 51.84% return, while Rydex Tempest 500, which returns twice the inverse of the Standard & Poor's 500-stock index, was up 35%. Total assets in Rydex's four bear stock funds are $565 million. Rydex offers 32 funds altogether.
Contrary to what many might expect, sales of bear funds historically have been strongest during bull markets when investors have extra money and want to protect their portfolios against possible declines, Mr. Tennes said.
Another bear fund, the Grizzly Short Fund, offered by Leuthold Weeden Capital Management of Minneapolis, has been attracting new money since August. The amount of money coming in has increased since the terrorist attacks, "but not hugely," said Paula Diemer, director of institutional client services. As the market began to regain some lost ground last week, there were some withdrawals from the fund.
Mr. Tennes cautioned prospective investors not to be lured into Rydex's short funds by their stellar short-term results without considering their downside potential. It is "extremely risky" to invest in a fund that not only is 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 last week to know how quickly short funds can roll downhill once a sustained recovery starts. Indeed, Venture 100 was the bottom performer of all funds, posting a decline of 19% for the week ended Thursday when stock funds overall climbed 5.4% on average, according to Lipper.
Mr. Tennes says funds such as Venture 100 are best used as a hedging tool in combination with other funds to reduce the volatility of investors' 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, 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 have exposure to a broad range of companies that make up the S&P 500, but also are hedged against the volatility of the technology stocks among them, Rydex says.
Write to Yuka Hayashi at yuka.hayashi@dowjones.com
-------------------------------------------------------------------------------- |
