Matt Paschke

Age: 32
Credentials: BA in finance, University of Northern Iowa; MBA, Carlson School of Management at the University of Minnesota
Experience: Senior analyst, Leuthold Group (2000-present); portfolio manager, Grizzly Short (2006-present); capital accountant, Honeywell (1999-2000)
Ticker: GRZZX
Inception of fund: June 2000
Style: Bear market
Assets under management: $340 million
Three- and five-year performance as of March 3, 2009: 28.1%Expense ratio: 1.50%
Front load: None
Minimum investment: $10,000
Alpha: -1.29% vs. Russell Midcap Value

Matt Paschke, a co-manager of Leuthold Weeden's Grizzly Short fund, will hasten to tell you that you probably shouldn't invest in his fund right now. He isn't trying to be provocative; he just thinks you may find better opportunities by favoring equities for a change. Grizzly Short bets against stocks' rising.

Since the fall, Grizzly's parent firm has made the case for stocks. They're historically cheap, says Steven Leuthold, the company's chief investment officer. Timing is a different matter. As Leuthold wrote in a recent research note, "I remain bullish and wrong." He also doesn't rule out further market declines, which is why the short fund is so handy for hedging. Leuthold Weeden advisors themselves use some version of the fund in clients' core and asset allocation accounts for this very purpose.

"This isn't a buy-and-hold strategy," Paschke says of the $340 million fund, one of seven mutual fund offerings from the firm. More than $100 million of new inflows were collected in the first two months of 2009. "It's a tool to be used tactically," he cautions.

Many probably wish they'd employed this very powerful tool sooner. Grizzly Short is among only a handful of offerings that have blithely benefited from the market plunge. While the S&P 500 shed 46.3% over the 12 months ended Mar. 3, Grizzly Short returned 88.6%, placing it in the top 18% of bear market funds tracked by Morningstar.

That performance helped the fund's long-term record too. For the three- and five-year periods that ended Mar. 3, Grizzly Short is up an annualized 28.1% and 12% respectively, landing in the group's top 5% for both periods.

Decidedly Neutral

The main premise behind the firm's cool stance toward its own offering is that with the S&P down more than 50% since its October 2007 high, much of the recession is factored into stock prices. That has given stocks the attractive valuations not seen for quite some time. In fact, today's valuations are well in the bottom decile of the historical range, according to the Leuthold Group, the firm's institutional research arm. Usually when valuations land down there, stock prices rise and multiples expand.

That doesn't mean that the economy and the market won't deteriorate further, however. "We think it makes sense to buy equities at these levels, but we're cognizant that equities could go down even further," Paschke says.

Not exactly clear-cut. The Leuthold Group is decidedly neutral at the moment, with a slight nudge in favor of equities. "We prefer to be out there with a call one way or the other," concedes Paschke, who joined co-managers Leuthold and Greg Swenson on Grizzly Short in 2006. "No one wants to give money to someone who says, 'I don't know what the future will bring.'"

But the short view is hazy at best. It's unclear where unemployment will land, exactly how many people will lose their homes to foreclosure or how many banks will fold. But in the longer term, things don't look so bad, Paschke says. Over the next five years, earnings will probably stabilize for a large swath of American companies as consumers land new jobs and start spending again. Paschke and his colleagues are willing to gamble that we're not headed for a financial decline on par with the Great Depression, when unemployment reached 25% and the gross domestic product fell 30%.

Stocks to Hate

A number of key factors are different now too. "Back then we didn't have unemployment insurance, Medicare or Medicaid and interest rates were in the double digits," Paschke notes. That said, there are still plenty of stocks for investors to despise—and therefore, to short.

To find these names, every other week the Leuthold team runs screens of potential losers—stocks with massive amounts of debt, high multiples and several quarters of underperformance relative to their peers among other factors. This list is the basis for the firm's "Vulnerability/Opportunity Index," which evaluates the downside potential of small- and mid-cap companies.