MUTUAL FUNDS
Nasdaq on the skids? Break out the Dom Pérignon! With ProFunds UltraShort OTC, your net worth could double.
The no-load UltraShort OTC is one of a breed of mutual funds that aims to profit from market downturns. Founded in 1998, UltraShort OTC is designed to double the inverse return of the Nasdaq 100; it has done this so far with 98 percent precision. During last April's meltdown, the fund gained 17 percent and outpaced the S&P 500 by 20 percent.
"We cater to two types of investors," says ProFunds president Michael Sapir. "One holds a stock portfolio and wants to hedge the risk. The other expects a downturn and wants to make the most of it."
Either way, these funds are friendlier than the traditional alternatives: shorting individual stocks, which carries a risk/ reward ratio on a par with diving into a pool at the shallow end, and investing in hedge funds, which require initial outlays in the $250,000 range. A mutual fund lowers the price of entry (UltraShort's minimum is $2,500), and limits risk to the amount you put in; it also saves you money on commissions. (UltraShort OTC charges a management fee of 0.75 percent of assets invested.)
Still, many financial planners hesitate to recommend short funds. "You need a large enough portfolio and sufficient education," cautions Terry Monroe, senior VP at financial adviser Robert W. Baird & Co. "2x leverage means significant volatility. If you had only $10,000 and the fund's volatility was 30 percent, I'd be very uncomfortable." Since the market's long-term trend is decidedly upward, it's smart to limit short exposure to a small portion of your portfolio. If the market rallies, the fund's value will plummet, so close monitoring is a must.
If hedging seemed unnecessary a few months back, growing uncertainty makes vehicles like UltraShort OTC more attractive. "When there's a bear market - and there will be - these funds will become enormously popular," Sapir predicts. With more than 40 percent of Americans counting on mutual funds to cover their retirement, you can bet that more than a few will decide peace of mind is worth a bit of upside risk.
- Jonathan Hoenig (www.capitalistpig.com)
ProFunds: www.profunds.com.
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