Best bear market money manager around

John Hussman, former economics professor, pulls out all the stops running his bear market fund.

More from Money Magazine

Put Santa's elves on a budget Squandering a minor's trust fund Weaker dollar, stronger returns

Best Places to Live Current Issue Subscribe to Money

NEW YORK (MONEY Magazine) -- Bear market funds are designed to rise when the market falls. Problem is, they tend to fall when the market rises. So their long-term returns often leave investors growling.

Hussman Strategic Growth (HSGFX), run by John Hussman, a former economics professor, is different. In downturns it acts like a bear market fund because he makes bets that stocks will fall when he senses trouble looming. During rallies the fund acts like anything but, so it grabs most of the market's gains. "No one can forecast the market," says Hussman, 46, "but you can understand the risk level of the market you're in."

His results speak for themselves. Over the past 12 months, Hussman Strategic Growth is down only 5.9% - fully 32 percentage points ahead of the S&P 500. Since its 2000 launch, the fund has delivered an 8.8% average annual return, vs. 4.8% for the S&P.

How does Hussman do it? Largely alone (he employs only one analyst) in a modest office in Ellicott City, Md., where he displays a talking Pets.com sock puppet "as an illustration of the danger of bubbles." He analyzes macroeconomic trends, stock valuations, and market indicators and looks for companies that sell at a discount to expected future cash flows. That strategy kept him completely out of financial and housing-related stocks over the past six years.

And when the indicators he tracks look ominous, he sells short futures on the S&P 500 and other indexes. A futures contract guarantees the buyer the current market price at a later date, so the deal is profitable only if the market declines and Hussman can buy the index at a lower price. To limit risk, Hussman doesn't go "net short," meaning that unlike a typical bear fund manager, he doesn't short more than the value of his portfolio. His shorts are hedges of the value of the stocks he holds.

Hussman's views, published weekly on hussmanfunds.com, are smart and direct. "The bondholders of poorly run financial companies should lose because they deserve to lose," he wrote recently. "The American public does not."

Now Hussman thinks stocks are relatively undervalued. Yet he has kept Strategic Growth fully hedged since last January. "I don't want to rely on the market to be okay," he explains. "I want to protect shareholders." Few do it better.

More Money 100:

Best funds you couldn't get in to - until now

Best simple money moves

Best places to find a job

Best ways to save $2K a year