Those investors were drawn to the fund, despite Hussman's miniscule marketing budget. The Ellicott City, Md., headquarters offices of Hussman Econometric Advisors remains a hands-on, low-overhead operation, with Hussman maintaining a professional staff of just two assistants who handle accounting, due diligence, research, reporting and administrative tasks.

Morningstar analyst Brian Lund expresses some concerns about the impact rapid growth could have on the fund's ability to produce market-beating returns in the future. "More assets could limit the fund's ability to profit from its stock-picking method, which draws on the relation of market prices and trading volume," he says. "As the fund's purchases exert greater influences on the market, it may become more difficult to exploit inefficiencies." He also has concerns about its short operating history and unpredictable level of market exposure.

Hussman insists that the fund's go-anywhere investment charter, which places no restrictions on market capitalization, gives him plenty of room to operate without bruising performance. He also points out that economies of scale allowed him to lower the expense ratio from 2% to 1.45% last November, about average for a domestic stock fund. The 1.5% redemption fee paid by investors who hold shares for less than six months remains in place to discourage short-term trading.

Given the flexible nature of the fund, concerns about an unpredictable level of market exposure seem unavoidable. The amount of hedging the fund employs changes with Hussman's view of market conditions and stock valuations. To assess market conditions, he looks at "trend uniformity." If trend uniformity is favorable, price trends advance across a wide range of industries and security groups-an indication that investors are willing to assume risk. When both valuations and trend uniformity are unfavorable, as they are now, the fund takes a fully hedged position.

Typically, the fund uses option combinations to hedge. Buying a put option on a stock index, and simultaneously selling short the call option having the same strike price and expiration, creates the same effect as selling short the underlying index. However, the fund can't go to a net short position, so it isn't designed to profit from a market decline. But it can hedge enough to moderate fluctuations in the portfolio. In a fully hedged portfolio, the return is driven by the difference in performance between the stocks the fund owns and the indices he uses for hedging-typically the Russell 2000 Index and the S&P 100 Index.

Today, with the fund fully hedged, the entire value of the stocks in the portfolio is offset by a short sale of equal value in the major market indices used for hedging. So if the market falls by 10%, and the stocks held by the fund fall by 5%, the fund's return would be about 5%. In contrast, if the market falls by 10% and the stocks held by the fund fall by 15%, the fund would experience a loss of about 5%.

The fund's hedging strategies tend to insulate it from short-term market blips, both up and down. Hussman acknowledges that in the initial stages of a market recovery, the fund could lag. "We are willing to defend capital at the risk of underperforming during short-term rallies," he says. "But the strategy does not restrict the fund from performing well during a bull market." When market conditions are more favorable, the fund can take a more aggressive stance by moving to a totally unhedged position, or using leverage.

Such a stance would point to a bull market, something the fund has yet to experience. Hussman says the performance of his individually-managed accounts reflect different investment parameters, and would provide little insight on how his fund might behave in a bull market.

Nor will he reveal whether he intends to reduce or eliminate his use of hedging any time soon. He doesn't try to forecast the market, he says, but simply tailors his approach to prevailing market conditions.

While those conditions make a powerful stock market rebound unlikely, he believes that the S&P 500 Index "remains priced to deliver total returns in the 3% to 5.5% range over the coming decade." He bases that calculation on an average earnings growth rate for the index of 6%, which he contends is more realistic than the figures many investment managers are using today. "Some people apply 15% growth rates to a large number of stocks over a long period of time," he says. "That's just not realistic in an economy that is only growing at a rate of 6% in nominal terms. Historically, it is very unusual for corporate earnings to grow faster than that over the long term.