The Only Guide to Alternative Investments You'll Ever Need: The Good, the Flawed, the Bad, and the Ugly

Chapter 20. Leveraged Funds

Throughout history, capital markets around the globe have rewarded investors for the risk that they take when they provide capital. Thus, all investors have the potential for a good investment experience—assuming they are willing to accept market returns. The most effective way to do this is to build a globally diversified portfolio of passively managed funds.

Not surprisingly, however, the overwhelming majority of individual investors aren't content to settle for market returns. Instead, they try to outperform the market through various methods such as stock picking, market timing, and fund selection. The unfortunate result for most investors has been below-benchmark returns.

Leveraged funds are one of the products that Wall Street's sales and marketing machine has created to entice investors with the tantalizing "promise" of outperformance. Leverage refers to the concept of increasing, multiplying, or magnifying the return of an investment through the use of funds that an investor or investment firm borrows. Salespeople hawk these investments with pitches like this one: "If the market returns 10 percent, why settle for that rate when you can earn 15 percent using the power of leverage?"

An example of a mutual fund that uses leverage to deliver the prospect of additional returns is the Rydex Nova Fund (RYNVX). A member of the Rydex family of mutual funds, this leveraged product is a no-load fund designed to provide investment returns corresponding to 150 ...