John Hussmanís hedging strategy helps his fund flourish in a bear market.

Although hedging strategies have helped Hussman Strategic Growth Fund thrive in a bear market, manager John Hussman's voice takes on an edge when he hears someone call it a "bear market" fund.

"This is emphatically a growth fund. It's not a market neutral fund, and certainly not a bear market fund," says the 40-year-old Hussman. "But we also have an articulated strategy that helps protect capital during unfavorable market conditions. The risk is that the fund may not always track the overall direction of the market."

Since the fund's inception in July 2000, shareholders usually have been rewarded for taking that risk. Hussman's hedging strategy, which uses a combination of put and call options on major indices to dilute the impact of broad market moves in the portfolio, helped the fund gain 5.5% for the 12 months ending March 10, beating the S&P 500 Index by some 35 percentage points. Last year, the fund rose 14.02%, versus a loss of 22% for the index. It gained 14.67% during 2001 and 16.4% from its inception to the end of 2000. It has also been much less volatile than the overall market, and has never experienced a decline in net asset value of more than 7%.

Its mettle has been tested more recently, with the fund having falling nearly 5.5% from its August 2002 peak through mid-March. While that's less than half the drop of most major market indices, it falls well below the level of outperformance that shareholders enjoyed in the past.

Hussman attributes the pullback to the fund's unhedged position of nearly 40% during the initial part of the market decline from its August peak, as well as slight underperformance by portfolio stocks compared with the major indices. In a letter to shareholders, he notes that he avoided companies that performed well over that period-namely debt-heavy media, telecom and financial services companies-because they do not have the financial stability and strong cash flow he's looking for.

The stocks he favors defy easy categorization because Hussman finds labels such as "value" or "growth" misleading. "Rapidly growing companies can be an extraordinary value," he says. "I bought Cisco Systems in 1991 when it had a price-earnings ratio of 35. But for that company at that time, it was a bargain." He typically holds about 100 stocks, with each position accounting for anywhere from 0.5% to 2% of portfolio value.

He also does not restrict the size of companies he buys, and has holdings ranging from yesterday's favorites such as Merck to more adventurous concerns such as Internet bookseller Amazon. Reflecting its eclectic mix, which includes a hefty dose of consumer service and manufacturing companies, Morningstar categorizes Hussman Strategic Growth as a mid-cap blend offering.

The common denominator for fund holdings is that they must have stock prices that appear reasonable in relation to the future stream of earnings, dividends, revenues and cash flow. He also examines financial statement information on capital structure, inventories, book value and other factors that influence financial results.

Despite the fund's bear market bravura and its rapid growth to about $442 million in assets, Hussman remains a fresh face in the world of mutual funds. He began his career in the mid-1980s as an options mathematician for Peters & Co. at the Chicago Board of Trade. He began publishing the Hussman Econometrics newsletter in 1988, and he started managing individual accounts in 1993 while an assistant professor of economics and finance at the University of Michigan, a position he held until 1999. By the time he started the fund in July 2000, he had some $25 million under management, including his own money.

He migrated those accounts into the mutual fund because he saw it as a more efficient way to manage them. With a minimum investment of $1,000 ($500 for IRA accounts), it also opened the door to smaller investors.

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