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On The Upside

The economy may be heading downhill, but for short funds, things are looking up.

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This story appears in the August 2008 issue of Entrepreneur. Subscribe »

When life hands you lemons, make lemonade, right? The same goes for the gloomy stock market. One strategy of late for pessimistic investors has been betting on downward movements and buying so-called short, or bear, funds, which are designed to go in the opposite direction of a particular index or an actively managed fund. In practice, when the market slips, bear funds should make money. "It's great for investors who think the market is overvalued or is going down to actually profit from that," says Ryan Harder, a senior portfolio manager at investment management firm Rydex Investments.

Investment dollars have been pouring into this asset class over the past few years. Since 2005, holdings in bear funds have jumped from $6 billion to $16 billion, according to fund data provider Lipper. "Because of the negative fundamental data of oil, employment, slow growth and increased inflation, there are many more [investors] trying to benefit from the volatility," says Kevin Meehan, president of Summit Wealth Advisors.

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