Wednesday, August 6, 2008

Inverse Funds on Steroids

So yesterday I did a post about never using inverse funds and gave the numbers on why they were bad to use. What about shorting the leveraged funds?? So far instance, lets say you had a negative view on the S&P 500. Well I showed that buying the 1x inverse or the 2x inverse was a horrible way to play it and shorting SPY (the index that tracks the S&P 500) was a much better bet. Well Doug had the incredible idea of shorting the positive 2x shares (the ultra shares). If there is a deterioration of value in owning the inverse, let it work for you? Amazing idea. If you would have shorted SPY from its high in October to now you would have made 17.3%. If you would have shorted SSO (the ultra S&P 500) you would have made 39%. More than twice the fall. Wait it gets better. If you would have covered at the top after April and May rally, you would have made 7.8% by shorting SPY and 23% by shorting SSO!!! The math caused it to vastly outperform in the counter trend rally preserving even more value.

Now when things sound this good they almost always are so if anyone can think of any reason why this is somehow flawed let me know.

The next thing I want to look at is arbitraging it. Can you short the ultra and arbitrage gains where you are almost eliminating risk??

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