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i wanted to illustrate the problem of "friction" in inverse funds: the fact that you add to positions when they go your way, and reduce positions when they go against you, instead of vice versa.
assume you have an index=100. you then have movements of +10%, -5%, +10%, -5% and -8.4%.
so the values are 100, 110, 104.5, 114.95, 109.2, 100 for a net move of 0%.
the inverse fund does this:
100, 90, 94.5, 85.05, 89.3, 96.8 for a net move of -3.2%.
so inverse funds are useful in trending markets, but have a significant cost of carry in ranging markets.
assume you have an index=100. you then have movements of +10%, -5%, +10%, -5% and -8.4%.
so the values are 100, 110, 104.5, 114.95, 109.2, 100 for a net move of 0%.
the inverse fund does this:
100, 90, 94.5, 85.05, 89.3, 96.8 for a net move of -3.2%.
so inverse funds are useful in trending markets, but have a significant cost of carry in ranging markets.
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