Monday, January 21, 2008

Shorting for the 21st Century

Be smart, be careful.
From BusinessWeek:

Inverse funds allow investors to place bets on predictions of a drop in stocks

Trouble in the economy and turmoil in the markets in 2007 rocked a lot of investment portfolios. But many people took advantage of new tools that made it easier to hedge against losses—and profit from predictions of pain ahead.

Inverse funds, either in the form of mutual funds or exchange-traded funds (ETFs), allow investors to place bets that the pain will continue. The funds use financial engineering techniques to move in the opposite direction of a particular index. A 1% drop in a financial sector index, for example, translates into a 1% gain for an inverse financial fund. Some of these vehicles are built to double up, giving you a 2% gain for a 1% loss in the index. Among the outcomes inverse investors can bet on are more losses in the financial sector, a collapse in the supercharged Chinese stock market, and falling share prices in the U.S....MORE