Riddle of the Sphinx

Mutual Funds

Riddle of the Sphinx

Why is Rydex steering its hedge-fund investors into an ordinary mutual fund?

Rydex sold Sphinx as a relatively safe hedge fund because it tracked a hedge-fund index. But now Sphinx is collateral damage in the implosion of commodities-trading firm Refco (see "Testing Its Mettle," Feb.). Refco's bankruptcy filing led to the freezing of some 10% of the Sphinx fund's $220 million in assets.

Jeff Joseph, a Rydex managing director, says the freeze has not affected Sphinx's net asset value, and he is optimistic that investors will recover their money. Meanwhile, Rydex wants shareholders to approve the liquidation of Sphinx and transfer of the fund's assets to a new mutual fund, Rydex Absolute Return Strategies. Between its inception in June 2003 and November 30, 2005, Sphinx returned an annualized 2%, versus 13% for Standard Poor's 500-stock index.

Rather than track a hedge-fund index, the new fund will pursue a number of hedge-fund strategies using in-house portfolio managers. The new fund is cheaper than Sphinx, with expected annual expenses of about 1.7%. Sphinx charged 1.95% for expenses, on top of the fees that went to managers of each fund in the index.

In the lingo of Wall Street, an absolute return strategy is one that seeks to produce positive returns year in and year out. Can Rydex's fund achieve this goal with its multistrategy approach? Who knows? We suggest that you pass on Absolute Return until it builds a track record.