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Thursday, September 18, 2008 8:49:23 PM
The double inverse funds leak, and the higher the volatility the worse they leak. SKF is pretty bad, SDS is tolerable over a few months.
Not sure about the double long funds, I've never had any interest. But you can repeat the exercise below and find out for yourself.
The funds generally do an excellent job of meeting their objective, i.e. to double the percentage move in the underlying. The problem with double inverse is that the math of this works badly in a sideways volatile market.
As an extreme example to demonstrate the problem:
Consider investing $1000 in fund QID, the double inverse of an index QQQ that starts at 1000. Assume the index goes up and down by 100 points over and over.
Day QQQ %change -2x%change QID
0 1000 - - 1000.00
1 900 -10.0% +20.0% 1200.00
2 1000 +11.1% -22.2% 933.60
3 900 -10.0% +20.0% 1120.32
4 1000 +11.1% -22.2% 871.61
As an example, I just closed a position in SDS which I'd held since Nov 2007. I estimate I took about 7% slippage over that time period. The slippage in SKF has been much worse, and FXP has been much much much worse.
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