Winning and Losing, Yet Still Coming Up Big

Carl G. Verboncoeur, chief executive of Rockville-based Rydex Investments, which does not market its mutual funds to the usual buy-and-hold investors.
Carl G. Verboncoeur, chief executive of Rockville-based Rydex Investments, which does not market its mutual funds to the usual buy-and-hold investors. (Rydex Investments)
By Jerry Knight
Monday, June 6, 2005

On most rankings of mutual fund performance, two fund families based in the Washington area show up among the biggest winners -- and the biggest losers.

It's no accident because the mutual funds managed by ProFunds of Bethesda and Rydex Investments of Rockville are designed for investors who want to take risks.

Not just the routine risk that every investor takes in buying stocks -- hoping they will go up, fearing they will go down -- but twice that much risk in some of the funds managed by the two firms.

If you think the market is moving up, Rydex Titan 500 and UltraBull ProFund are mutual funds that are designed to go up twice as much as the Standard & Poor's 500-stock index. Which means, of course, that if the S&P goes down instead, you will lose twice as much money as you would in an ordinary mutual fund that tracks the S&P index.

Doubling the S&P's Gains (And Pains): The UltraBull ProFund is designed to deliver a return that is twice as high (or low) as the S&P 500 stock index.
Or if you are absolutely certain that the market is heading down, Rydex and ProFunds have "inverse funds" that go up in value when the market goes down. For the truly confident contrarian, they even have "double inverse" funds that move in the opposite direction of the market -- multiplied by two. For example, when the S&P falls by 100 points, the UltraBear ProFund and the Rydex Tempest 500 go up by 200 points. Of course, when the S&P moves in the wrong direction, your losses double.

"People don't quite know what to make of it," acknowledges Michael Sapir, the chief executive of ProFunds, who founded the firm with partner Louis Mayberg. Sapir worked with the Skip Viragh, the late founder of Rydex, before launching ProFunds.

Sapir explained that the exotic funds were created to serve the needs of active traders and professional money managers. They want investment vehicles that will allow them to try to make money regardless of what is happening in stocks or other markets and to make more money than they can by simply buying stocks. The funds are also widely used in hedging strategies where the risk of one investment is offset by another investment.

Their track records are good enough that investors have put more than $13 billion into the Rydex funds and more than $7 billion into ProFunds.

That $20 billion is a lot of assets under management for two companies that started on the back streets of Bethesda -- Rydex in 1993, ProFunds in 1997 -- and since have grown to dominate their peculiar niche in the mutual funds market.

Most mutual funds promote themselves as low-cost, low-risk vehicles for small investors who want to build a nest egg. Instead of trying to pick stocks on your own, the conventional funds say, let us do the stock picking for you. And even if you can only put in a few thousand dollars, you can buy a mutual fund and watch your investment grow over the years.

Today the biggest single flavor of stock fund is the "index fund" that eliminates stock-picking and simply invests in all the stocks in the S&P 500, the Nasdaq 100 index or some other popular measure of the market. The theory is that stock research is costly and so ineffective that the majority of managed mutual funds never even match the performance of a broad index like the S&P, let alone "beat the market."

Rydex and ProFunds are in the index fund business but with various twists. Their latest innovations are funds that allow investors to bet on whether the value of the U.S. dollar will rise or fall compared with foreign currencies.

CONTINUED     1        >

© 2005 The Washington Post Company