Where Both Bulls And Bears Can Run Wild

Market timers get little respect in the mutual fund community. Skip Viragh saw this firsthand when the fund company he worked for shut down a fund that was popular with aggressive money managers looking to call turns in the market. So Viragh started Rydex Series Trust to cater to the needs of these pariahs of the investment world.

The centerpieces of his strategy are the Nova and Ursa funds. With more than $100 million in assets each, the funds invite timers to take stands on which direction the market is headed. Nova is a souped-up index fund, which timers buy when they're bullish. Ursa, Latin for bear, is for those who think the market is heading south.

Rydex doesn't charge for barreling into a fund or beating a hasty retreat. And there's no limit on the size or frequency of switches. "Most mutual funds have an attitude that you buy and hold for life," gripes E. James Welsh, president of Welsh Money Management. "This is an environment where market timers are more than welcome."

DIRTY WORD. Rydex' unique strategy has attracted more than $380 million into its family of six funds in little more than a year. Rydex also offers funds that track movements in small-cap stocks and precious metals. And Viragh is planning new funds based on suggestions from clients.

Derivatives, a dirty word in some mutual fund circles, keep Nova and Ursa running smoothly while timers move money around. For Nova, Viragh buys futures and call options on the Standard & Poor's 500-stock index. By substituting futures and options for stocks, Viragh keeps transaction costs down and liquidity high.

Nova's extra-heavy weighting of call options makes the fund more volatile than the S&P itself. The fund should produce 50% greater gains than a regular index fund in an up market, an attractive feature to timers who usually jump into a rising market after prices turn up. But Nova shareholders had better be right: the fund will suffer greater losses in a down market. Through July 31, Nova was down 4.3% while the S&P 500 was off just 0.21%.

SHORT TIMERS. The Ursa Fund is equally innovative, enabling timers to sell short by buying a mutual fund. Ursa gains on market declines because it sells S&P 500 futures and buys S&P put options. Both yield profits as stocks fall. The fund's performance runs opposite to S&P. Since its inception on Jan. 7, Ursa is up 2.4%.

Although the funds have no entrance or exit fees, management fees and other expenses for Nova and Ursa come to an above-average 1.5% of assets per year. That figure should come down as the funds grow. Rydex also requires a $10,000 minimum investment--which keeps out small accounts that are costly to service. Viragh also tries to hold down expenses by working out of low-rent space in Bethesda, Md., and outfitting the office with beat-up furniture.

The market turbulence this past spring highlighted Rydex' value to its clients. For instance, the bullish Nova fund had just $8.1 million on Apr. 20. The next day, a strong earnings report from IBM sparked market optimism, traders switched to Nova, and the fund swelled to over $63 million. Another day later, sentiment changed again and all but $11 million of Nova's assets bolted.

"The timers were looking for the market to break out," Viragh says with a laugh. "And when it didn't, they said sayonara." That lack of commitment--a nightmare for most fund managers--is Viragh's dream come true.

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