In the bull market, investors have stampeded to aggressive mutual funds. But will investors flock to bearish mutual funds with the same enthusiasm if the markets face a sustained bear market? That is a bet some fund advisers are taking - with mixed results.

Unlike traditional mutual funds that strive to hold stocks in their portfolios that appreciate, "bear" mutual funds bet that an index or strategically-assembled portfolio of stocks will decline.

Bear funds generally employ hedging techniques that include "shorting the market." That entails selling borrowed shares of company stocks with the expectation that those stocks' prices will decline. When the shares do decline, managers purchase the lower-priced shares of those same securities, making a profit on the spread between the two prices.

Several bearish mutual funds were introduced five or six years ago. These include funds by Rydex Funds of Rockville, Md., and The Prudent Bear Fund, managed by David Tice & Associates of Dallas. These funds have developed a loyal following of predominantly registered investment advisers.

Recently, two new bear funds have been introduced and a third is expected to be introduced in June. The Bear 500 Fund, advised by First Austin Capital Management in Austin, Texas was introduced in October. The fund shorts the stocks in the S&P 500 composite stock index in an effort to provide a positive return equal to any negative returns the S&P 500 index posts. First Austin is also the adviser to the Texas Capital Value & Growth Fund.

The idea for the Bear 500 Fund arose when executives at First Austin believed they saw a need for a bear fund to cater to the broker/dealer channel, said Mark Coffelt, president of the Texas Capital Value Funds group and president and chief investment officer of First Austin. First Austin chose to inversely track the S&P 500 because it believed it was the most understood market index.

"We just felt that given the build up in the (registered investment) advisor market, we could do reasonably well in the broker/dealer market," Coffelt said. "There is a great deal of risk in the market." Consequently, First Austin created the Bear 500 Fund to provide brokers with a fund to offer their clients to hedge that market risk.

But the fund has not been well-received, Coffelt said.

"We have seen both hostility and resistance among brokers," Coffelt said. "We found it is difficult to find brokers that are interested. People don't want to hear about (the possibility of a bear market) or talk about it."

The fund has attracted $1.6 million through May 7. But Coffelt said his firm is undeterred and expects the fund will attract more assets in the future. But that is not likely to happen until a true bear market emerges, he said.

Another bear fund, the BearGuard Fund, the flagship fund of Skye Investment Advisors of Los Gatos, Calif. was introduced in November. While this is Skye's first bear fund, Skye has been managing assets for high net worth investors using a bearish strategy for 11 years.

Instead of tracking a specific stock index, The BearGuard Fund assembles a basket of 75 stocks it believes are highly overvalued, then shorts these stocks. It promotes itself as the only short-only fund that is actively-managed.

After three years of strong stock market performance, Paul McEntire, chairman of Skye, decided his bearish investment style would probably work in the mutual fund arena, too, he said.

"We saw other defensive mutual funds gathering assets," said McEntire. "There was an increasing concern among investors that the party was over."

But the fund has been struggling to command attention. While most investors calling for information on the fund have done well in the market and now are looking for ways to preserve the wealth they have accumulated, there has been no flood of assets, said McEntire.

So far, the no-load fund has attracted $1.3 million. But McEntire said his firm has been receiving many calls and sending out fund information packages to potential investors over the last several weeks.

Despite the reception these funds have received, another bear fund is scheduled to be introduced in June by Leuthold Weeden Capital Management of Milwaukee, Wis. A registration for The Grizzly Short Fund, a no-load fund, was filed March 31, just two weeks before the NASDAQ, S&P 500 and Dow Jones 30 indices plunged on April 14.

The Grizzly Short Fund will "short" a basket of about 50 stocks that the manager believes are overvalued and will likely decline in price. Leuthold currently manages the Leuthold Core Investment Fund.

The repeal, in August 1997, of the "short-short" rule which capped the percentage of gross revenue mutual funds could derive from short-term trading, prompted the introduction of several new funds employing a shorting strategy, said Steve Leuthold, chairman of Leuthold Weeden and president of the Leuthold funds. His firm has been using the technique for the past nine years for high-net-worth individuals and hedge funds.

"We moved the idea into mutual fund clothing," Leuthold said.

The fund was designed for both active traders and investors with long-term gains who do not want to cash out but want to hedge those gains, said Leuthold. Leuthold expects the fund will be useful for registered investment advisors who will be under pressure from clients to reduce their equity exposure.

It has been mostly smaller fund advisers who have introduced bear funds. Large fund advisers do not appear interested in following suit.

American Century Investments of Kansas City, Mo. and Fidelity Investments and Putnam Investments, both of Boston, said they have no plans to offer bear funds. The idea of a bear fund jars with the bullish mindset large fund groups have relied on to build their businesses in the first place.

"We're a bullish company," said Brian Spano, a spokesperson at American Century.

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