ProFund Bear Sees Tech at the End of the Tunnel
September 16, 2002
Bill Seale, a principal and director of portfolios at ProFund Advisors of Bethesda, Md., has more than 30 years of experience in financial services. At one point in Seale's career, he was appointed commissioner of the U.S. Commodity Futures Trading Commission by then President Ronald Reagan. Seale oversees the management team in charge of ProFunds' 74 specialty bull and bear index funds, two money market funds and 22 variable insurance products, with a total of $2.5 billion under management. The firm's bear funds have the dubious distinction of being some of the best-performing funds so far this year. MFMN Associate Editor Chris Frankie recently interviewed Seale.
MFMN: What's the rationale for your bear market fund? After all, owning a bear market fund over the long term has got to be a losing strategy since stocks have always risen over long periods of time.
Seale: This kind of product is not a strategic investment. It's a tactical tool. If you put your money in the bear fund and you just leave it there for the long haul, you're not going to have a whole lot of money left.
It's a tactical tool that allows you to do two things. The first is that it can earn a return as a market goes down. We have funds up probably 70% to 80% year-to-date. You can also use a bear fund to offset the losses in a long portfolio as the market goes down, or essentially as a hitching type of a tool.
MFMN: Explain your fund's overall strategy.
Seale: The strategy of the fund is simply that we short the market. For our bear fund, if the S&P is down 1% today, the fund will be up 1%. The Ultra Bear does twice the inverse of the market. So, if the S&P 500 is down 1%, the fund will be up 2%. The fund is re-balanced every day at four o'clock.
MFMN: What's the basic strategy of the Ultra Bear fund? What's it mostly comprised of?
Seale: It's a fairly straightforward position. The way that we do it at ProFund is we essentially use only futures contracts in almost all of them. But we would typically try to do it with a combination of short futures contracts and short total-return swap agreements.
We do not sell securities in our portfolios nor use the options strategy, that is, the puts/call combo, because we don't think they're that efficient. We think it's an expensive way to go about creating short exposure.
However, you can use several different things to run this kind of index bear fund. One thing you can do is you can sell short securities. Another thing you can do is sell futures contracts or short swaps agreements. And the fourth thing you can do is you can use a put/call combo.
MFMN: If your investors put $10,000 in the Ultra Bear Fund in 97, they would have only had a net profit of $379. So, what's the sense in offering a fund like this in a bull market?
Seale: You can't look at it as a buy-and-hold investment. We've moved away from the world where you buy something and you hold onto it forever, and when you die and give it to your kids, they hold onto it forever.
Every investor needs to have an investment plan, which needs three components to it.
The plan needs to have an idea of what to buy and how to get into the position. The second thing is a strategy for re-balancing. And the third, which is very important with bear funds, particularly, is that you have to have a pain threshold. You have to have some idea of when you are going to get out of this position if you are wrong.
MFMN: So obviously there is no ideal timetable in which to invest in the Bear Funds. It should be primarily dictated by the market's movement.
Seale: You have to be cognizant of what's going on in the market and you have to be prepared to move into the fund as the market goes down, and you obviously need to be prepared to move out of the fund as the market goes back up.
MFMN: A lot of folks are predicting an economic rebound next year, saying the market's excesses have been rung out. Will this cause the ProFund Ultra Bear fund to go into hibernation?
Seale: It'll start going down. We make no effort to truncate the loss in any fund if the market goes against the fund. We're pure indexers. If the market were to rebound, what will happen is the fund will begin to fall, and as the market continues to rebound it would continue to fall and fall.