Several weeks ago I became very annoyed with 2x inverse funds as I realized they were not giving the returns of 2x. I voiced this annoyance to another investor and he decided to put the pencil to it looking at if you short the index, buy a 1x inverse fund, or 2x inverse fund.
Assumed 10 days of gains and losses of:
Day 1 = -8.33%,
Day 2 = 9.09
Day 3 = -8.33
Day 4 = 9.09
Day 5 = -4.17%
Day 6 = 8.70%
Day 7 = -8%
Day 8 = -13.04%
Day 9 = -5%
Day 10 = 10.53%
This gives a total return for the actual index of -12.50%
The results assuming $200,000 short bet in the index or inverse and $100,000 in the 2x inverse .
If you short the index you make 12.50% or $25,000
If you do the 1x inverse you make $11,613.30
If you do the 2x inverse (once again $100,000 investment) you make only $3,571.34 or only 3.571% even though the index declined 12.50%!!!!!
It has to do with the math of the investments. The most shocking thing for me is that even the 1x inverse under performs a straight short. That is crazy.
If anyone wants the excel model (which graphs the performance over the 10 days) email me and I will shoot it your way.
Bottom line - don't invest in inverse funds.