by Gary H. Elsner, Ph.D.
Mutual funds show a less than stellar performance relative to
the Standard & Poorís 500 index. It should come as no
surprise, then, that Wall Street has responded by offering
products that mimic the S&P 500. Going a step further, some
funds are set to do the exact opposite of the S&P 500 and
thereby offer a hedge. Here are some guidelines.
The right financial instruments
are the keys to great investing.
Over the last four years, 90%
of mutual fund managers have
been outperformed by S&P
500 index funds, so it is no
surprise that new funds created
to outperform the S&P
500 have attracted attention. I
refer to these as designer funds
because they are designed to
perform in specific ways, as opposed to having the simple
objective of maximizing returns.
As an example, the Rydex Nova fund is designed to have
150% of the movement of the S&P 500. If the S&P 500 goes
up 6%, Rydex Nova will go up approximately 9%. If the S&P
500 goes down 6%, then Rydex Nova will go down about 9%.
Not only that, recently introduced funds are designed to have
movements of up to 200% of the S&P 500. And there are
funds that move in an inverse relationship to the S&P 500 and
the NASDAQ 100 as well.
If we refer to these enhanced movements as leveraging, we
can create just about any degree of leveraging by investing
different amounts in one of these instruments and in a money
market fund. Letís take a look at the new designer funds,
study how we can achieve various degrees of leveraging and
determine ways in which these funds can be used in developing
new investment models.