The year's worst-performing mutual fund--Profund's UltraShort OTC of Bethesda--and one of the year's best--Warburg Pincus Japan Small Companies of New York--have something in common. Neither is for the faint of heart.

UltraShort came in rock bottom among all equity mutual funds, falling 58.87 percent in the fourth quarter and 80.36 percent for the year. That's at a time when the U.S. stock market continued its stellar run, with the Standard & Poor's 500-stock index gaining 14.88 percent in the fourth quarter and 21.04 for the year.

What happened? "The fund did exactly what it was supposed to do," said William E. Seale, director of the portfolio. By that he means it moved inversely to an index of the 100 largest, most frequently traded nonfinancial companies on the Nasdaq Stock Market. The stock index for those companies went up 101.95 percent last year.

Seale and Profund chief executive Michael L. Sapir say that the UltraShort fund is not for anyone who dislikes risk. Nor is it for long-term investing.

Rather, UltraShort is a fund for investors who can tolerate--and afford--risk, and who believe that in the short term the market is going to fall. The fund is made up of a combination of futures and options that are selected so that the portfolio moves twice as much in the opposite direction of the daily movement of the Nasdaq 100 index.

Clearly, they say, it's a fund that succeeds best when the market falls.

On the other hand, Seale and Sapir note that their Profund's UltraOTC fund, which came in as the 18th-best performer in 1999, with a gain of 232.48 percent, uses futures and options to try to double the daily return of the Nasdaq 100--which it did.

The UltraOTC fund, unlike the UltraShort OTC fund, is for long-term investors, they said.

Long-term investors are also the targets of P. Nicholas Edwards, manager of Warburg Pincus Japan Small Companies, though only if they are looking for a fund to diversify their portfolio and are willing to accept higher risk in exchange for potentially higher returns.

Those who did invest in the fund in 1999 were well rewarded: It was the second-best performer of all equity funds, gaining 328.66 percent for the year. And the fund had the best record of all equity funds investing in Japanese companies, which as a group were top performers last year.

What set Edwards apart from his peers, said Heather Haynos, assistant analyst at Morningstar Inc., a mutual fund tracking firm based in Chicago, is that he invested in Japanese firms with small market capitalizations. Capitalization refers to a company's stock price multiplied by the number of its outstanding shares.

"There's been a lot of optimism about a recovery" in Japan, Haynos said. And, she said, more than 40 percent of his holdings were in a particularly well-performing class of companies--high-technology firms such as Hikari Tsushin, Softbank and NTT Mobile.

Hikari sells mobile phones and handsets. Softbank is a major Internet company investor and is a major stockholder of several U.S. companies, such as E-Trade Securities Inc., the second-largest online investment trading company, and Morningstar, which has significantly beefed up its presence on the Web. NTT is Japan's largest mobile-phone operator, even offering customers access to the Internet.

Edwards, who is fluent in Japanese and has managed Japan stock funds for 17 years, the last five with Warburg Pincus, said he focused on three themes in picking stocks last year: the positive, albeit slow, recovery of Japan, the accompanying restructuring of its economy, and the new emphasis there on technology and other service-sector businesses.

Investors have looked to foreign investment funds as a way to profit from overseas growth as the U.S. economic machine slows. One potential pitfall in that strategy, however, is that foreign stocks tend to fall when U.S. markets swoon.

Edwards agrees that is true but says that, as long as the U.S. economy has a soft landing, rather than an abrupt and deep recession, he believes the correlation between the shares of companies in Japan and the United States will disconnect. That will allow investors to profit in the long run from Japan stocks even if U.S. markets slow, he said, and is why he thinks investors in his fund should stay with him for the long haul.

But, cautions Haynos, anyone unduly concentrating their money in a fund such as Warburg Pincus Japan Small Company should expect to assume very high risk. That's because it is concentrated in one country and more than 40 percent of its assets are in one sector--telecommunications and other high technology.