Money comes in easy gobs to the truly clairvoyant

December 03, 2003|By JAY HANCOCK

RELYING on nothing except your investment skill, economic knowledge and clairvoyant powers, you could have turned $25,000 into $2 million this year by market-timing Rydex Funds.

It's Jan. 2, 2003. Knowing as you do that the Nasdaq will rise for a few days, you sink your stake into the Rydex Velocity 100 Fund, which doubles the gains and losses of the Nasdaq 100 index.

Boom. You're up 8.6 percent in a week.

Suddenly you get a negative Nasdaq premonition. You shift everything into the Rydex Venture 100 Fund, which rises twice as fast as the Nasdaq 100 falls and vice versa. The index sinks, and you make 5.5 percent in a day.

Then you're back in the Velocity Fund for a week. Up 10 percent before the market slips back, by which time you're over in the Venture Fund again for a 17 percent gain.

A couple more double-reverses like this and you've got an 80 percent compound gain for the month. A few more months like January and you're on your way to a life of worry-free idleness and debauchery.

What? You say mutual fund companies don't allow such faithless flip-flops from people like you? You say they limit you to two or four switches a year? You say only huge hedge funds being investigated by Eliot Spitzer could (formerly) get away with this kind of market timing?

Check out Rockville-based Rydex Funds, where market timers snubbed by Vanguard and Fidelity are made to feel like Prince Bandar checking into the Four Seasons.

Most funds say they discourage quick in-and-out moves because rapid cash turnover can drive up administrative costs, lower returns for buy-and-hold shareholders and make life miserable for investment managers.

Not Rydex. There, the swashbuckling investor with at least $25,000 can buy a fund Monday, sell it Tuesday, buy it back Wednesday and so on, ad infinitum, with no penalty.

Many funds limit customers to a few investment-changes a year. Not Rydex, which advertises "unlimited trading privileges for most of our funds."

Some funds charge a "back-load" sales commission if you withdraw your money before a certain date. Not Rydex, which collects no load on the front or the back of a trade.

Some funds, of course, that said they banned or limited market timers apparently didn't. To lure big chunks of capital and maximize fees, they allegedly allowed select players, typically big hedge funds, to exceed trading-frequency limits.

This is the focus of much of the recent investigation by New York state Attorney General Spitzer and others. There is nothing wrong with market-timing per se. What's wrong is pretending to limit it and then making exceptions for high-rollers.

At Rydex, there's no such double-standard. Every client can be a mutual fund day trader. And many are.

"Only about 20 percent of our clients are active investors," defined as people switching funds more than eight times annually, says spokeswoman Dawn Kahler. But, she adds, "some of those active investors trade every single day."

Some more-passive Rydex customers use the funds to offset risks in other investments, officials at the decade-old company say. For example, those heavily into blue-chip stocks might hedge the bet by buying the Rydex Ursa Fund, which declines when the S&P 500 index rises.

Most Rydex funds are index-based, which gives the company leeway to handle market timing with more aplomb than actively managed funds can. Index-based targets mean that Rydex fund jockeys can hoist net asset values into the proper position using options, futures and other derivatives instead of buying individual stocks. Annual expenses are under 1.75 percent.

Whatever the attraction, Rydex is having "our most successful year ever," says Chief Operating Officer Michael Byrum. Assets have risen from $6 billion at the beginning of the year to almost $10 billion, and as much as $3 billion of that is new money, not market appreciation, he said.

If you want to time the market, Rydex looks like a good place to try. The question is, why?

The market timers in Spitzer's sights had a couple extras going for them. Not only did they rapidly move in and out of funds, but they often allegedly backdated trading prices, which allowed risk-free (and probably illegal) gains.

They also supposedly seized on overnight developments in Asia and elsewhere to make easy money in international funds whose prices weren't updated until much later. (Rydex says it stymies this scheme by quickly adjusting international-fund values.)

With those advantages, they really were clairvoyant. You're not.

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