Bear funds in a bull market
Funds that bet stocks will fall are delivering top returns.
February 27, 2002: 6:51 p.m. ET
By Staff Writer Martine Costello
|
NEW YORK (CNN/Money) - Whether you're a bull or a bear, it's been a long and cold winter for mutual funds. Large cap funds, tech funds, growth funds. You name it, they've all lost money.
But there's one tiny group of funds that has been delivering great returns -- funds that short stocks.
Bear funds, which keep all of their assets on the short side, are up as much as 38 percent in the past 12 months, while the S&P 500 is down nearly 13 percent. A handful of funds that have the flexibility to short stocks if they want are also up big.
"It's a way to make money when the market is going down," said Jesse Noel, a manager at Potomac Funds, which has four bear funds.
Making money in a down market
In its simplest definition, a short sale is when you bet the price of a stock will fall. To short a stock, you borrow it from a broker at a certain price and sell it. If you're right and the price falls, you buy back the stock at a lower price, repay the broker and pocket the difference.
Of course, bear funds are a tiny speck in a universe of 11,000 mutual funds. The vast majority of funds buy stocks on the hopes that prices will rise, not fall.
There are only about a dozen bear funds that short all of their assets, and even fewer that short part of their holdings. Bear funds were at the bottom of the performance charts throughout the 1990s bull market. When stocks started falling in early 2000, bear funds started rising.
"Markets go up more than they go down," said Charles Tennes, senior vice president at another prominent bear fund shop, Rydex Funds. "But it's been a ruthlessly declining stock market, so the funds have gotten their day in the sun."
For example, Potomac Internet/ Short, which shorts the Dow Jones Internet Index, is up 18.6 percent year to date as of Feb. 26, according to Morningstar. The fund earned 15.2 percent in 2001 and nearly 60 percent in 2000.
Another top performer, Rydex Arktos, which shorts the Nasdaq 100, is up 10.7 percent this year. It earned 15.1 percent last year and 23.5 percent in 2000.
Short selling by traditional mutual funds was uncommon until the repeal of the so-called "short-short" rule in the Taxpayer Relief Act of 1997. The short-short rule had prevented funds from earning more than 30 percent of their profit from short sales. (Funds that were 100 percent short weren't affected.)
After the repeal, some traditional fund names were able to deliver great returns by going short, like Schroder Ultra. Manager Ira Unschuld earned 147.7 percent in 2000 and 73.5 percent last year, Morningstar said.
Ken Heebner of CGM Focus said he used extensive shorts in 2000 and 2001 because of what he saw as a "total disconnect" with valuations in telecoms and techs. The fund earned a healthy 53.93 percent in 2000 and 47.85 percent last year, Morningstar said. It is up 80.3 percent in the past 12 months.
Bill Miller, who has beat the S&P 500 a record 11 years in a row with Legg Mason Value Trust, also tested the waters on the short side. Legg Mason Opportunity, a mid-cap blend fund that Miller called an "experiment," can short stocks and make currency bets, Morningstar said. The fund has had mixed success, losing 1.7 percent in 2000 but gaining 1.9 percent last year.
AIM mutual funds also introduced three funds in the past few years that can short stocks, all managed by Charles Scavone. AIM Large Cap Opportunities, Mid-Cap Opportunities and Small-Cap Opportunities all lost money in 2001, but were within the top 20 percent of their categories in 2000.
An unspoken practice on Wall Street
All mutual funds by charter have the ability to short a small piece of their assets, usually 10 percent or less. Because of loose fund reporting rules, you might not ever know that your fund was short on a stock. (Click here to read more about fund disclosure rules.)
Nobody tracks short-selling by mutual funds, though short sales hit a record on the New York Stock Exchange as of February, according to the Big Board.
And getting a traditional fund manager to talk about his shorts is like trying to get him to tell you his ATM password. Efforts to reach Miller for comment were unsuccessful. Tice and Unschuld declined to comment about what they're shorting. A spokesman for Scavone said AIM does not comment on its short funds.
Paul McIntyre, manager of Marketocracy Technology Plus Fund, said he's shorting about 15 stocks, or about one-third of his portfolio. Among his top picks to take a fall are Peregrine Systems (PRGN: up $0.14 to $8.66, Research, Estimates), Nextel Partners (NXTP: up $0.61 to $5.11, Research, Estimates), and Priceline.com (PCLN: unchanged at $4.40, Research, Estimates).
Peregrine Systems offers too broad of a spectrum of software, while Nextel Partners spent too much money on infrastructure and advertising to gain market share, McIntyre said. He also questions Priceline.com's business model and the way the company records revenue. For example, when Priceline sells an airline ticket, it lists the full price of the airfare as revenue, not just its commission.
McIntyre said his shorts give him a nice cushion in a down market. For every dollar invested in stocks, he's got about 30 cents short. He uses the stocks as collateral for his shorts.
"This is a lower-risk way to invest in technology," McIntyre said. "The value of shorting is that it provides the opportunity to make returns when the market is weak." 
* Disclaimer
Click here to send mail to Martine Costello
|
| SPECIAL: |
|
|
|
|
|
|
