Paying A Premium
Funds that employ techniques such as shorting are also more expensive than traditional long-only funds, said Todd Rosenbluth, a senior director at New York-based Standard & Poor's. The average expense ratio of funds that have the ability to short is 2%, compared with 1.3% for large-cap value funds, he said.
"Investors are paying 70 basis points more for these alternative strategies, which will hurt returns even more," he said.
The Federated Prudent Bear Fund and the $97 million Comstock Capital Value Fund, the oldest bear-market mutual fund, use a combination of options, short sales and fixed-income securities that reflect their conviction that the U.S. stock market will decline.
Comstock Partners, which is owned by Mario Gabelli's Rye, N.Y.-based mutual-fund company Gamco Investors Inc., in 1985 opened a mutual fund that allowed managers to bet on rising as well as falling markets. Minter said he started out bullish and turned pessimistic just before the stock market crash of 1987. Betting on a decline in equities helped the Comstock fund return 34% in 1987, when the S&P 500 rose 2%, according to data compiled by Bloomberg.
'We Got Slaughtered'
The Comstock fund, managed by Minter and Martin Weiner, suffered when the managers doubted the stock market rally from 1995 to 2000. Their skepticism only paid off after the market crashed in 2001 and 2002, helping the fund advance 65% during those two years. In the four-year market recovery that started in 2003, the fund lost 51%.
Moves by then-Federal Reserve Chairman Alan Greenspan "created a cyclical bull market between 2003 and 2007," Minter said in a telephone interview from Philadelphia. "We got slaughtered throughout that period," Minter said.
In a March report outlining Comstock's macroeconomic forecast, Minter and Weiner said U.S. stocks are in a "secular bear market." The rising levels of U.S. debt, continuing weakness of the U.S. housing market, and high valuations of U.S. stocks will push the market down over the next several years, the managers said.
'Two Ways to Lose'
Pimco's Gross and Chief Executive Officer Mohamed El-Erian have coined the term "new normal" to describe diminishing market returns against the backdrop of higher government intervention, persistent unemployment and the decreasing role of the U.S. in the world economy.
Despite the Pimco bear fund's performance relative to peers, Lake Partners' Lake said investors need to be "judicious" about how much they put into such strategies. The Pimco fund may be vulnerable to losses if the stock market continues to go up and an increase in interest rates pushes bond returns down.