A Fund That's Actually Making Money

The stock market has been such a disaster this year that if you uncover a fund that's made money, you know you've found something out of the ordinary. Hussman Strategic Growth (symbol HSGFX) is such a rare bird. Year-to-date through October 3, the fund earned 3% year, a stunning 27 percentage points better than the deflated Standard & Poor's 500-stock index.

John Hussman runs Strategic Growth as a long-short fund. That means he can (and does) buy and hold stocks he likes at the same time that he bets against stocks by selling short such indexes as the S&P 500, Nasdaq 100 and Russell 2000. Hussman, who holds a doctorate in economics from Stanford, says that since he launched the fund in July 2000, he's found the market consistently overpriced. So he's taken short positions to hedge his longs -- and made money for his shareholders every year.

One reason for Hussman's gloom was that he foresaw the looming debt crisis. In a July 2003 essay, entitled "Freight Trains and Steep Curves," he fretted about the dangers to homeowners and corporations of rapidly growing adjustable-rate debt and dependence on low, short-term interest rates. The "unwinding of extreme leverage," he wrote, would leave the nation vulnerable to an "acceleration of defaults" and a debt crisis. And, no, Hussman wasn't invited to advise the Federal Reserve or the Treasury Department.

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So not only has Hussman, who's based in Ellicott City, Md., maintained short index positions since 2000, but he's also avoided owning stocks in the financial sector. His long positions today tend toward reliable cash generators, such as Johnson & Johnson (JNJ), Colgate-Palmolive (CL) and Coca-Cola (KO).

Hussman's reasons for starting Strategic Growth are interesting. When he surveyed the mutual fund landscape eight years ago, he determined that few funds had the ability to mitigate downside market risks for investors. "The mandate of most fund managers is to track an index, and if that index is down 30% and they're down only 25%, they win," he says. So he set out not only to beat the index but to do it with far less risk. From the fund's inception through October 3, it returned 10.5% annualized, while the S&P 500 dropped 1.7% a year. With annual expenses of 1.11%, Strategic Growth is a little like a poor man's hedge fund.

So how does this economist see the future? He expects several rocky quarters for the economy but says that the stock market is approaching fair value for the first time in eight years and inflated profits are finally returning to more-normal levels. Hussman says stocks will deliver annualized returns of 6% to 8% over the next eight years.