If there's one thing Paul McEntire learned during his time as a rocket scientist, it's that what goes up must come down. In the 1960s, he calculated trajectories to get the Apollo astronauts to the moon and back. Last fall, with stock prices sky-high, McEntire launched a mutual fund that would capitalize on the market's inevitable downward swings.
BearGuard debuted October 28 as the nation's first "short-only" stock fund. The fund aims to help people reduce risk through a bit of what McEntire calls "defensive" investing: hedging against a bear market by placing some bets on BearGuard's "shorts" -- companies that are presumably overvalued and can't be sustained -- while also holding stocks whose prices are expected to rise in the long term. The fund operates by borrowing stock from a long-holding brokerage company and selling it on the open market, then waiting for the price to fall, buying back the stock and returning it to the broker while pocketing the profit.
Jeff McConnell, an analyst for the fund-tracker Morningstar, says McEntire's concept "is legitimate and does make sense." But it's too soon to predict whether BearGuard will succeed, McConnell says, noting that the approach "is similar to the market-neutral funds that combine longs and shorts, which have done poorly in the past year."
A math major with advanced degrees in engineering-economic systems, McEntire got the idea for the fund while completing his doctoral research on portfolio diversification theory in the early 1980s. In 1985, he and electrical engineer Rob Larson, MS '61, PhD '64, started Skye Investment Advisors, a Los Gatos-based firm that specializes in short-selling as a means of diversification. Four years later, they created a private mutual fund based on their theories -- the father of the new BearGuard.
Though some may call him a pessimist, McEntire insists he's not rooting for a bear market. Quite simply, he says, "history shows that the market goes in cycles, and the incredibly lofty valuations right now can't be maintained forever." He's quick to caution against putting too much of a portfolio in shorts: "Remember, one or two aspirins can be helpful, but don't down the whole bottle."
Does it take a rocket scientist to beat a bear market? McEntire's investors are banking on it.
-- Jennifer Davis, '99
