Fund name: Rydex Managed Futures Strategy, H shares (RYMFX)

Objective: The fund tries to match the performance of the S&P Diversified Trends Indicator, an index comprised of 50% commodities and 50% financial futures. The fund can be long or short any of its components except the energy sector, in which it always holds a long position.

Adviser: Rydex Investments. Rydex manages more than $16 billion in assets via more than 80 mutual funds and exchange traded products. Their investment specialty is providing retailer investors with access to complex strategies formerly available only to high net-worth individuals and institutions.

Manager: Michael Byrum and five others. Mr. Byrum is Rydex’s president and chief investment officer. He’s been worth the firm since its founding. Mr. Byrum oversees a number of Rydex’s other funds, including all of its sector funds.

Management’s Stake in the Fund: As of April 2008, none of the managers and none of the members of the board of directors own any shares in the fund.

Opening date: March 2, 2007.

Minimum investment: $2,500 for regular accounts and $1,000 for retirement accounts. The "H" shares are only available through financial intermediaries such as the fund supermarkets run by Fidelity and Schwab. It is possible to purchase shares directly from Rydex, but the minimum purchase for those shares is $25,000.

Expense ratio: 1.73% on assets of nearly $900 million.

Comments: This fund has returned 10% in 2008, through Halloween. That’s good. It has outperformed its long-short peer group by 24% this year and has eked out a 44-point advantage over the S&P 500. It’s posted those returns while investing in commodities (a group that it leads by 56 points) and financials (which is leads by 52 points). And "managed futures" represents the only hedge fund category which is in the black for 2008. On whole, that seemed to warrant a moment’s examination.

RYMFX positions itself as an absolute return fund. That is, its goal is to make money even when the stock and bond markets tank. The good news is that its benchmark, the Diversified Trends Indicator (DTI), has achieved that goal every year since 1985. The bad news is that the Diversified Trends Indicator has not existed since 1985; it was created in 1999, reconfigured on several occasions and then back-tested to 1985. That means that the Indicator’s authors had the luxury of picking and choosing among possible investments until they found the ones that would have worked in the past (if only we had known). Back-testing is a treacherous art since it’s rarely the case that history repeats itself (though, Mark Twain noted, "it does rhyme"). By way of analogy, if would be possible to assemble today a portfolio of whatever stocks haven’t lost money in the past 20 years and then market it as a stock portfolio that never loses money. Yet.

What does the fund do? It invests in "structured notes" offered by various financial titans (Goldman Sachs now, Bear Stearns until . . . well, there was no more Bear). Those notes are designed to mimic the movement of components of the DTI, without requiring the fund to invest directly into commodity or currency futures. The DTI is balanced 50/50 between commodities and financials and rebalanced monthly. The commodities include everything from energy to lean hog bellies. The financials range from Australian dollars to U.S. Treasury notes.

Management tracks the current performance of each component of the portfolio against its seven-month moving average. If a component’s current performance drops below its average, the managers short that component. The only exception is in the energy investments, which are always long. The idea is that there’s no correlation between the fund’s portfolio as the stock market (the correlation is -.07) or the bond market (+0.03), or the other components of the portfolio (the price of cotton is unconnected to the value of the euro). As a result, the fund should be able to profit modestly, but continually, by shorting falling commodities or currencies and staying long the others.

It has worked so far. The fund has bond-like volatility (standard deviation of 6.8) while its back-tested index has produced stock-like returns (11% annually over 20+ years in the back test). As I noted above, the DTI has never had a losing year. For the period of its back-test, the portfolio produced positive returns during four of the S&P 500’s worst five months while producing negative returns in three of the S&P’s five best months.

Bottom Line: This sort of strategy will look appealing as long as the stock market suffers from extended periods of indigestion. Rydex rather specializes in this sort of fund, and is apt to execute the strategy competently. And the strategy has been embraced by advisors to the rich, though typically for a small slice of a large portfolio. I have an intrinsic distrust of complex strategies whose success has occurred largely on paper but folks committed to finding a market neutral component for their portfolio might put this on the same due-diligence list as Nakoma Absolute Return (NARFX) and Hussman Strategic Growth (HSGFX).