Band's Bear Fund Hedges

09/18/2002 12:00 am EST

Focus:

Richard Band

Editor, Profitable Investing

In addition to gold and oil as a potential hedge against market turmoil, Richard Band, editor of Profitable Investing, suggests hedging one's portfolio through such choices as puts, short-selling, and bear market funds.

"There’s a chance—small but not negligible—that the market slide will continue and do further damage to investors’ pocketbooks. Please understand: I’m not predicting this outcome. But I do think it’s enough of a risk to consider some defensive action.

To hedge a portfolio, the investor can buy put options. Says Band, think of a put the way you view fire insurance. If your house doesn’t burn down, you lose your insurance premium. But is that so bad, considering the alternative? Band notes that investors can also sell short; to hedge an entire portfolio he suggests shorting an exchange-traded index fund, such as the S&P Spyders or NASDAQ QQQs."

However, for those unfamiliar with the risks associated with puts or short selling, Band notes that there are mutual funds that can help you hedge. Says the advisor:

"Both the Rydex (800/820-0888) and ProFunds (888/776-3637) families include so-called bear funds, which go up in value as the stock market tumbles. Rydex Ursa aims to perform inversely to the S&P 500, while Rydex Tempest doubles the leverage: for every 1% the S&P drops, Tempest rises about 2%. Bear ProFund and Ultrabear ProFund fill exactly the same roles as their Rydex counterparts. Both families also sponsor funds that track the NASDAQ 100 index in reverse.

For the Rydex funds, the minimum to open an account is $25,000; for the ProFunds, it’s $15,000. However, some discount brokers will let you in for less. One interesting benefit of the bear funds is that they enable you to sell short inside a retirement account. (IRAs and Keoghs aren’t ordinarily allowed to sell short, but they can invest in any kind of mutual fund.)"

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