BusinessWeek – With the U.S. economy facing the likelihood of a recession, is it too late to jump on the bear-market bandwagon? David Tice, manager of the Prudent Bear Fund, doesn’t think so. "Unfortunately, long bull markets are typically followed by long bear markets—and we just had one hell of a bull market," Tice says. "This is going to require a 10-year secular bear market."
Admittedly, Tice thinks that is an overly gloomy assessment. "I hope I’m wrong," he says. But even with the recent market rally, bears like Tice are certainly looking smarter than average these days. Mutual funds that try to capitalize on distressed financial markets and assets make up the only diversified domestic equity-fund category to post gains so far in 2008, rising nearly 11% through Mar. 31. The typical U.S. stock fund? Down almost 11% for the first quarter of 2008, according to Morningstar, the Chicago fund-tracker.
Bear-market funds take short positions using futures and options, typically betting against an index such as the Nasdaq 100 or the Standard & Poor’s 500-stock index. There are 42 bear-market mutual funds, and more than 35 bear-oriented, exchange-traded funds (ETFs), including ProShares Short S&P 500 ETF and more esoteric offerings such as the UltraShort FTSE/Xinhua China 25 ProShares ETF. The most powerful of the bunch use leverage to juice returns as much as 2.5 times the inverse of an index. In other words, when the target index loses 1% on a given day, the fund should gain 2.5%.
