Ithas been a disastrous 10 years for 'short' funds, but hopes of a market fall spring eternal PHOTO: CHRISTOPHE VORLET By Jason Zweig Jan 12, 2018 9:49 am ET 21 COMMENTS Imagine losing 80% or more while, all around you, investors are basking in the glory of one of the biggest bull markets in history. Imagine racking up year after year of losses while stocks are going up nearly 400%. That’s what it’s like to run a short-selling fund that hedges against the risk of a falling stock market. If you’re a contrarian who is naturally attracted to parts of the market that have been losing money on the grounds that they are ripe for recovery, bear this in mind about these funds: On average, in the long run, you will lose money if you hold them. Over time, stocks tend to go up more — and more often — than they go down. “So one would not expect an investor to be permanently short and, in fact, most should be permanently long,” says Mohsen Fahmi, co-manager of the $2.1 billion Pimco StocksPlus Short Fund. “I’m pretty sure that 99.9% of our investors understand that the fund is designed to make money when the market goes down,” he says. “Perhaps, after nine years of a bull market, if any didn’t know what they were getting into, they do now.” The S&P 500 hasn’t had a down year since 2008, when Taylor Swift was 19 years old. Ever since stocks began trading in Amsterdam around the beginning of the 17th century, some investors have sought to profit when the market falls. Bears or short sellers typically seek to borrow stock, sell it and then buy it back at a lower price, locking in the difference as profit. That works brilliantly when stocks drop. In 2008, the average bear-market fund gained 30%, according to Morningstar, even as the S&P 500 stock index fell 37%. If you’d invested in the average bear fund on Sept. 15, 2008, the day Lehman Brothers collapsed, and then sold your position on March 9, 2009, the absolute bottom of the financial crisis, you would have gained 58.5%. Meanwhile, the S&P 500 lost 45.1%. What if you had hung on? From March 9, 2009, through this past week, the average bear fund lost 92.9%, according to Morningstar. Over the same period, the S&P 500 is up 389.6%, including dividends. On average, bear funds have lost money nine straight years — exactly as they should have in a rising market. Every single one of the 64 such funds with assets of at least $2 million had negative returns in 2017, according to Thomson Reuters Lipper. Mr. Fahmi’s Pimco StocksPlus Short Fund seeks to improve performance by using the money left over after it bets against stocks to forage across the bond and currency markets. As of now, the fund should benefit if 10-year U.S. Treasury inflation-protected securities appreciate and if emerging-market currencies rise against the dollar and other currencies issued by developed nations. Is Mr. Fahmi bothered that Pimco StocksPlus Short has lost money nine years in a row? “Sorry to disappoint you,” he laughs. “It doesn’t cause [me] any sleepless nights. I’m very proud of our performance.” The fund has done its job — and then some. MORE IN THE INTELLIGENT INVESTOR Four Things Sure to Happen in Markets During 2018 Less Phone, More Nature: 34 Resolutions For a Better 2018 Energy Investors: Behold the Miracle of the Tax Law Dreaming You Can Get the Returns of Stocks Without the Risk? Dream On Index Funds Rule the World, But Should They Rule You? It lost 14% last year, even as the S&P 500 went up 21.8%. A direct bet against the S&P should go down by about the same amount as the market goes up, so a loss of only 14% is impressive. Pimco StocksPlus Short gained 48.6% in 2008, the last time the S&P had a down year. Another bear-market portfolio, the $190 million Grizzly Short Fund, gained 73.7% in 2008 but has lost money in eight of the nine years since. “We recognize the market goes up more than it goes down,” says Greg Swenson, the fund’s co-manager at Leuthold Weeden Capital Management in Minneapolis. “As long as clients know that and we know that, it takes a lot of the stress out of it.” Mr. Swenson isn’t predicting an imminent crash. However, high profits, low unemployment and bullish sentiment suggest “things are so good, they can’t get much better, and they could turn very quickly.” As the market has kept surging, he says, minimizing losses “has been the battle for the past couple of years.” The fund gained 3.8% in 2015 but lost 14.4% in 2016 and 19.8% last year. His fund, unlike the Pimco portfolio, doesn’t short the S&P 500. Rather, it bets against specific companies based on such factors as how much stock management is selling, whether the supply of shares outstanding is growing, and the extent to which other short sellers are angling for the price to fall. Investors looking for cheap companies nowadays might as well be opening hens’ mouths looking for teeth. But bears seeking to profit when overpriced stocks collapse need at least as much patience — or uncanny clairvoyance — along with a high tolerance for pain.