Rydex funds take alternate road to top in industry

June 17, 2007|By Jay Hancock | Jay Hancock,Sun Columnist

Three Maryland mutual fund companies rose triumphantly from out of the 2000-2002 stock disaster.

Baltimore rivals Legg Mason and T. Rowe Price did it the old-fashioned way: by excelling at the fundamentals of stock picking that 1990s investors had forgotten. Rockville-based Rydex Investments took another path.

As most mutual-fund firms were getting back to basics, Rydex stayed exotic. As most funds tried to discourage short-term trading, Rydex promoted it. As index funds lost favor, Rydex piled on more of them.

As most companies urged people to ride stocks' long-term rising trend, Rydex helped smaller investors bet that stocks would fall - which they did precipitously in the early 2000s.

If we can believe the prices being quoted for Rydex's impending sale, which has been reported by several news outlets, the strategy paid off in a huge way. Hate Rydex or love it - there are reasons to do both - it's hard to argue with its success, and its sale would mark another step in the maturing of the money-management business.

Rydex spokeswoman Lori Klash would not confirm that buyout talks are under way. But MarketWatch, Dow Jones, The Street.com and MutualFund Wire.com, which says it broke the story, have all said that the sale of all or part of Rydex is imminent. People are throwing around price tags of $700 million or $1 billion.

Rumors of a sale have circulated since A.P. "Skip" Viragh died of cancer three years ago at age 62. Viragh founded Rydex in 1993 with the idea of making some of Wall Street's increasingly sophisticated financial tools available to regular Joes.

Like many funds, Viragh's first product tracked the S&P 500 stock index. But the Rydex Nova Fund had jet fuel in the tank instead of unleaded.

For every 10 percent gain in the S&P 500, Nova was designed to deliver a 15 percent return, thanks to financial derivatives. True, Nova would equally amplify the loss if the index went down. But in July 1993, when the S&P 500 was 450, the upside was the place to be. A thousand dollars put in the fund in 1993 was worth nearly $4,000 by early 2000.

Viragh, however, was only getting started. In early 1994 came the Rydex Ursa Fund, designed to gain when the S&P 500 went down, in equal proportion. Rydex says it was the first mutual fund allowing investors to "short" the market.

Later came funds that let you place turbocharged bets on or against bonds. Or the Dow Jones stock index. Or the Nasdaq 100 index.

What's more, Rydex placed no limits on how often you could move in and out. Day trading in stocks was all the rage in the 1990s, and Rydex encouraged the equivalent in mutual funds.

The company's "long" funds delivered spectacular results in the 1990s.

And in the early 2000s, its short funds did the same thing. While almost every other mutual-fund company suffered big withdrawals, Rydex was one of the few places where ordinary investors could make profits while markets plunged.

Today, the company has 80 funds - including exchange-traded funds - and $14 billion in assets.

You can invest in the "Inverse High Yield Strategy," which produces the reverse of results in the junk-bond market. You can invest in 150 percent of the results of the Russell 2000 stock index, and you can make currency bets.

As expensive, lightly regulated investment pools called hedge funds have run riot in recent years, the financial press has hailed Rydex and rival ProFunds (based in Bethesda and started by a former Rydex executive) as tool kits for do-it-yourself hedge funds.

This is partly true. For people who know what they're doing or with good financial advisers, Rydex products can supplement broad portfolios, lower risk and minimize taxes. If you own a bunch of S&P 500 stocks, fear a decline but don't want to sell and pay capital gains taxes, a piece of Rydex's Inverse S&P 500 Fund (the renamed Ursa Fund) might do the trick. You can buy sector funds that zig when the rest of the market zags.

But for many investors, Rydex undoubtedly provides a sophisticated way to lose money. For all but a few, buying and holding for very long periods is the only way to be in the stock and bond markets.

In either case, Rydex can be expensive, with fat loads paid to advisers and high management costs.

Nobody is forcing people to buy its funds, however.

By bringing Wall Street products to Main Street, Viragh advanced the democratization of capital that began with the home mortgage a century ago. As we have seen with recent abuses in the subprime mortgage market, sometimes that trend is a good thing, and sometimes it's not.

jay.hancock@baltsun.com

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