These mutual funds use tactics like selling short to make money when the stock market falls. Owning bear funds can help investors lower their portfolio risk by hedging, something many pros do routinely. The idea is to play both sides of the market, so gains in the bear fund offset losses elsewhere in your portfolio when equities slump. For example, Rydex Series Trust Ursa Fund, whose 1994 launch makes it the oldest bear fund, has declined an average 14.2 percent annually over the past five years. Still, day traders and others wanting to bet against short-term market moves have found bear funds useful.
Bear funds follow two basic strategies.
But the majority of the funds have a simpler approach. Fund manager William Seale achieved this result by selling Nasdaq 100 index futures contracts short. The fund's goal is to move twice as much as the Nasdaq 100, but in the opposite direction. The fund invests in a mix of put options and futures contracts to try to achieve the mirror image of the Dow Jones Internet index. Paul McEntire, manager of the BearGuard Fund, says he doesn't bet on the direction of individual indexes.