Five Plays for the Pessimistic

Here's a small list of funds that can earn money in a bear market, mostly by using exchange-traded funds as a vehicle for selling short

by Alex Halperin

Is short-selling the last refuge of the scoundrel? It's sometimes said that making short plays—betting that the stocks, bonds, or other securities will go down—is unpatriotic, as if pessimism and money can't mix. Nonsense. There's no reason red-blooded, true-blue market players should only profit from securities on the way up. While there's plenty of money to be made when the market advances, there are also ways to gain from a downturn, whether it's the sharp sell-off that investors saw in February or the prolonged doldrums of the first years of this decade.

Just as there are different types of downturns, there are various methods for investors to gain some exposure to short positions: they include both hedging an existing position, or full-on betting that a stock will drop. Since the overwhelming market trend over the past several decades has been up, as a whole short plays don't perform as well as their long counterparts. However, for investors wary of high volatility, they can smooth out the performance chart during choppy times on Wall Street.

The most common way to play the short game is probably a fund with a long/short strategy designed, like many short bets, to insulate investors against major drops in the market. Not everyone likes the idea. Andrew Tignanelli, president of financial planning firm Financial Consulate, says "I don't want [mutual funds] to hedge the market. I want them to manage risk." Increasingly, however, exchange traded funds (ETFs) provide short opportunities without investors relying on the instincts of active-fund managers.

With that in mind, this week's Five for the Money takes a walk on the short side of the street by examining a few options for investors looking for protection against a downturn.

1. Prudent Bear Fund (BEARX)

No, it's not managed by a suddenly circumspect Winnie the Pooh. This fund, actively managed by David Tice & Associates, is dedicated to the premise that the stock market is in the midst of a long slump. The Prudent Bear fund has some long exposure but the primary focus is on short plays. It engages in short selling and put options that reserve a right to sell a stock at a specified price.

How's the performance? Well, returns appear to be in hibernation, with a 4.16% annual rise over the five-year period ending in February and a slight annual decline over ten years. However, as 2007 has been a rocky year for the market, bears have been somewhat vindicated. It's up slightly year-to-date, not far behind the Standard & Poor's 500-stock index.

2. Gateway Fund (GATEX)

A far less radical move than the Prudent Bear, Gateway is primarily a long fund emphasizing dividend-paying stocks. However it employs mechanisms for minimizing downturns during bear markets. Barry Glassman, senior vice-president at financial planning firm Cassaday & Co., calls the fund a vehicle for investors that want to "participate in the market but want to limit the downside."