Picking a good short mutual fund isn’t easy. The 2003-07 bull market decimated most interest in them. During that period rational bears were curb-stomped by an irrational bull market. Government regulation hasn’t helped either. But, even though the markets are down 40% from highs, I still think these are worth consideration. I’m still holding these two bear funds, and think a re-test of last year’s lows is inevitable.

Prudent Bear Fund

Prudent Bear is a unique fund. For the most part it shorts U.S. equities, indexes, and futures. But they also have some long positions in gold-mining stocks, as a hedge against inflation and devaluation of the dollar. They also hold a few long positions in stocks they think are undervalued. But the vast majority of the fund is short.

Ownership change – it should be noted that Prudent Bear was recently bought by Federated Investors. The previous chief manager, David Tice is no longer directly managing the fund. But he will still be closely involved as the “chief portfolio strategist for bear markets” at Federated.

Fortunately, the new guys running the fund have great resumes: Douglass C. Nolan and Ryan Bend. Mr. Nolan previously worked for shorting-god Bill Fleckenstein’s fund, which reaped huge gains shorting equities over the past few years. The other manager is Ryan Bend, who is coming over with Prudent Bear, so having him and David Tice around should ensure that it doesn’t veer too far from the previous manifesto.

Grizzly Short

GRZZX is a pure short fund. They use a proprietary tool called the “Vulnerability Index” to find juicy short opportunities. I have no idea how it works, but it works. Grizzly is up 69% over the last year, and up 7.57% over the last 5 years. Not bad compared to the S&P’s -40.5% performance over the last 52 weeks.

Fundamentally, a re-test of  2008 lows seems inevitable. I think U.S. equities will go a lot lower in 2009. That said, the bailout-effect is an unknown, so it’s impossible to make concrete predictions. Do U.S. equities deserve a big smackdown? Yes. Will they get one? Maybe.

It’s important to realize that the stock market is now entirely dependent on how our government is going to intefere. Not if, or when. The question is how. I like to think that Obama will let markets correct more naturally than Bush did. But the pressure from voters/pumpers to artificially prop up equity/housing markets is extremely strong.

Disclaimer: This is NOT investment advice. Always talk to a professional when making investment decisions. Disclosure: I have NO affiliation or interest in any funds or securities mentioned in this post.