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The first short-only fund
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October 29, 1999: 4:10 p.m. ET
BearGuard Fund hopes to be a good hedge for investors in bad times
By Staff Writer Martine Costello
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NEW YORK (CNNfn) - Fund manager Paul McEntire has been a high-tech odds maker since his days as a young rocket scientist calculating trajectories to get Apollo astronauts to the moon.
So it's probably not much of a stretch to see why he would launch a new mutual fund with a revolutionary strategy of investing only in short positions where you bet stock prices will fall.
The BearGuard Fund, which debuted Friday, will allow small investors to hedge their portfolios against bad times, he said.
"We're really not rooting for a bear market," said McEntire, a Ph.D. from Stanford University. "It's like fire insurance. You don't hope for a fire but you keep some insurance just in case. It's a good component for people with stock exposure to make the ride a little smoother."
McEntire said the fund will be broadly diversified across different sectors and asset classes. He declined to comment about specific holdings because of the nature of short selling.
"It's a little delicate on the short side," McEntire said. "What we're saying is basically we think the price is too high."
The fund will use shareholder dollars to buy U.S. Treasury bills and short-term bonds for use as collateral to short U.S. stocks.
Short selling by mutual funds is relatively new, allowed only because of the repeal of the so-called "short-short" rule in the Taxpayer Relief Act of 1997, said Jeff McConnell, an analyst at fund-tracker Morningstar.
The rule had prevented mutual funds from earning more than 30 percent of their profits from short-selling, McConnell said. Market-neutral funds, which use a combination of traditional "long" positions as well as short positions, debuted not long after the repeal of the short-short rule.
While the Rydex Ursa Fund shorts Wall Street indexes, McConnell said he's never seen a mutual fund that shorts individual stocks exclusively.
"The problem with short strategies is the general trend of stock prices is up over time," McConnell said. For that reason, he doesn't see it as a long-term strategy and thinks it will attract mostly "hot money."
"I don't think it would be something people buy and hold for a long time," McConnell said.
McEntire argues that the fund's typical investor will be somebody with mostly long positions in his portfolio who wants a hedge. If you have a lot of money you can invest in a high-flying hedge fund, but the average investor hasn't had a way to use a hedge strategy before now, he said. He also manages private hedge fund accounts.
"We feel as a long-term strategy having a portion of assets hedged is reasonable," McEntire said. He agrees stocks will rise over the long term, but said high price-earnings ratios make it more likely that the market will be soft in the next few years.
(The price-earnings ratio, or p/e, is the stock price divided by the earnings per share).
While the BearGuard Fund is debuting near the 70th anniversary of one of the Dow's biggest percentage losses, the one that ushered in the Great Depression (Oct. 29, 1929), McEntire says the timing is coincidental.
"We're not gloom-and-doomers," McEntire said. "I can say the unabated euphoria does seem to be receding a bit. I think the volatility on the upside and the downside we've seen lately is perhaps a sign that people are starting to take a look at their positions that have doubled and tripled."
But McConnell said another downside could be costs. Market neutral funds have never made a profit, primarily because their trading costs and fees are so high, he said.
"It's incredibly costly to be truly market neutral," McConnell said. "You have to constantly rebalance."
Market neutral funds have total expense costs of 2 to 3 percent, which is exorbitant by industry standards, he said.
McEntire said the fund's overall fees will be a maximum of about 2.75 percent, so a $10,000 investment would cost $278 for one year and $1,352 for three years, assuming an annual return of 5 percent. The three-year figure is much higher because the fund's adviser waived its 1.25 percent fee in the first year. McEntire said it's likely that fee will be waived long-term, as well.
McEntire said he hopes the expense ratio will fall as the fund's assets grow.
"There are unique requirements on funds that do long and short," McEntire said. "In our case, in shorting, there's extra work to be done in picking the stocks."
McEntire, who got a math degree from Stanford, worked on the Apollo moon project in the late 1960s before joining a management consulting company. He earned his Ph.D. from Stanford in how to best diversify an investing portfolio.
McEntire said he has found both rocket science and asset management fascinating in their own ways. The BearGuard Fund will use a combination of math models and his own judgment calls to pick stocks to short.
"In the Apollo program, you're figuring out trajectories to get people to the moon," McEntire said. "And in the world of investments, the field is in its infancy in terms of the science of investing."
The Dow Jones industrial average got a facelift this week, adding technology heavyweights Microsoft (MSFT) and Intel (INTC). So here's how some technology funds fared in the week ending Oct. 28, according to Lipper Analytical Service.
At the top of the list is Janus Global Technology fund, with a gain of 6.91 percent for the week. The fund is up 101.10 percent year-to-date. The second-biggest winner was the ICON Technology fund, up 6.35 percent for the week and 57.67 percent since Jan. 1. First American Technology Fund: Class A shares completed the trio, rising 6.28 percent for the week and racking up a gain of 82.25 percent for the year so far.
On the other end of the spectrum, the biggest loser was Monterey Murphy New World Technology fund, with a loss of 0.80 percent for the week, but a gain of 34.18 percent for the year. It was followed by the Amerindo Technology fund, Class D shares, down 0.36 percent for the week, but soaring 147.37 percent for the year-to-date. Last on the list of losers came the Enterprise Internet fund, Class B shares, shedding 0.21 percent over the past week. Annualized results for the fund were not available.
-- Staff writer Martine Costello covers mutual funds for CNNfn.com. If you have any comments on mutual funds, you can contact her at cnnfn.interact@turner.com
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