The majority of people who take the plunge and invest often do so without having an exit or protection strategy in place to deal with down markets. With the disappearance of Bear Stearns, the bailout of Fannie (NYSE:FNM) and Freddie (NYSE:FRE) and the worry surrounding the future of Lehman Brothers (NYSE:LEH), exploring investments that utilize short and inverse positions to benefit from a falling market are worth exploring. The following are a group of bear market funds for investors to consider. (To learn more about short selling check out Short Sales For Market Downturns.)
Shorting the S&P 500
The PIMCO StockPlus TR Short Strategy A (PSSAX) fund is designed to short the S&P 500 index by using derivatives in conjunction with a basket of fixed income in order to provide positive returns when the index is falling. PSSAX is managed by Bill Gross who is thought of as one of the world's best fixed-income money managers. Since the beginning of the year the fund has returned just over 17% to investors. As large institutions shed their losses over the next few months, PSSAX should provide a buffer to a declining S&P 500 index.
Inverse of the S&P 500
The RYDEX Series FDS, Inverse S&P 500 Strategy A (RYARX) seeks to return the inverse return of the S&P 500 index without going for any additional alpha (risk-adjusted return above the index). The PSSAX fund has more discretion to use a combination of derivatives -primarily short positions - and fixed income to amplify returns. RYARX also holds some short positions. The fund has returned about 15.22% since the beginning of the year. (To learn more, read Inverse ETFs Can Lift A Falling Market.)
Shorting the US Dollar
The RYDEX Series FDS, Weakening Dollar 2x Strategy A (RYWDX) offers investors the opportunity to multiply their downward outlook of the U.S. dollar. The US Dollar Index has climbed from around $72 in mid-July to August to around $79 at the beginning of September. The upward move of the dollar has pushed RYWDX down in recent weeks. Investors may want to wait for a pullback of the US Dollar index before pursing this investment. Note that the RYWDX fund is small with about $16 million in assets under management. (For in depth discussion on currency ETFs, check out Profit From Forex With Currency ETFs.)
On days when the market moves 2% or 3% to the upside investors should be thinking of how to protect the downside. If institutions do decide to clear their books of this year's losses, the bear funds mentioned should help investors protect themselves before the next "end of the financial markets" scenario hits the newswire.