Is Short-Selling The Way To Invest In 2003?

Investors Offshore, New York

02 January 2003

Internet investor site Morningstar says that only 269 out of the 7,504 domestic-equity funds in its database are in the black for last year, while for international-stock funds only 101 of 1,806 funds managed a gain in 2002.

Morningstar says that most of the winning funds in 2002 were in sectors which bucked the bear market in stocks, such as real estate and precious metals; but a sizeable minority of winners were funds specialising in shorting stocks. Still, Morningstar doesn't recommend holding more than a small proportion of a portfolio in short specialist funds.

US mutual fund managers don't seem to be taking Morningstar's advice, however: many of them, perhaps desperate to protect their wasting assets against further falls, have turned to short selling.

"After really tough times, people are realizing something we believed was prudent all along," Paul McEntire of the Marketocracy Technology Plus Fund to Reuters. "It's not a bad idea to do some hedging in adverse markets. It does allow you to play both sides of the street."

About 9% of domestic stock funds are currently shorting stocks, according to Morningstar, up from 3% in 1999, when you had to be nearly brain-dead to lose money in most stock markets.

McEntire, who lost only about 10.7% in 2002, has under 20% of the fund in short positions, but says the ability to employ the tactic gives him "a tremendous advantage." He added that he makes only small bets on the short side.

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