The Hussman Funds pursue a value-conscious, historically-informed, risk-managed investment discipline focused on the complete market cycle.
The Hussman Funds comprise four risk-managed mutual funds intended to contribute long-term returns and diversification, expanding the opportunity set available to conventional investment portfolios.
The Hussman Funds are diversified, no-load mutual funds for investors seeking:
- long-term investment returns
- increased market exposure in conditions that have historically been favorable
- added emphasis on capital protection in conditions that have historically been unfavorable
- diversification beyond conventional long-only investment strategies
Each Fund varies its exposure to market fluctuations – from neutral to aggressive – based on the unique return/risk characteristics of each Market Climate we identify.
While the intent of our value-conscious, historically-informed, risk-managed, full-cycle investment discipline is to achieve long-term returns at controlled risk, there is no assurance that the Hussman Funds will achieve their objectives. The investment return and principal value of the Funds may fluctuate or deviate from overall market returns to a greater degree than other funds that do not employ these strategies. An investor’s shares, when redeemed, may be worth more or less than their original cost.
Value-conscious, historically informed, risk managed discipline focused on the complete market cycle
Since 2000, Hussman Strategic Advisors, Inc. has been the investment advisor to the Hussman Funds. We use an ensemble of evidence to classify investment conditions, with “valuation” and “market action” being the most important considerations .
Valuation focuses on the relationship between current security prices and the long-term stream of cash flows expected to be delivered in the future. While earnings are important, the simple fact is that stocks are not a claim on earnings. In order to provide for future growth, a portion of earnings is reinvested in capital that will depreciate away. A portion is diluted by grants of options to corporate insiders. A portion must be retained as working capital to support future revenue growth. Stocks are a claim on free cash flow – the portion of earnings that remains after all other claims have been satisfied. This free cash flow can be used either to pay dividends or to repurchase stock for the benefit of shareholders (reducing the number of shares outstanding and thereby increasing the ownership stake of existing shareholders). The higher the price an investor pays for a given stream of future cash flows, the lower the long-term return earned by that investor. The lower the price an investor pays for a given stream of future cash flows, the higher the long-term return earned by that investor.
Market action focuses on the joint behavior of a wide range of individual securities, industries, sectors, and security-types, including debt securities of varying creditworthiness. Market action gauges aspects of market behavior well beyond obvious trends of major stock indices, and also considers overextended extremes in the range and duration of prevailing trends. For this reason, market action may be graded as positive even when major stock indices have recently declined and, conversely, may be graded as negative even when major stock indices have recently advanced.
In our view, market action provides an indication of the psychological preference of investors toward speculation or risk-aversion. Specifically, when investors are inclined to speculate, they tend to be indiscriminate about it. In contrast, increasing selectivity is often a sign of increasing aversion to risk. We analyze the quality of market action, not the extent or duration of any particular advance or decline. Deterioration in our measures of market action typically implies that investors have become sensitive to risk, that their “sponsorship” of stocks is not robust (based on measures such as trading volume), or that price trends have become so overextended that the market is highly vulnerable to disappointment. When security prices are richly valued, concerns about risk can drive prices quickly lower. For that reason, the Funds place added emphasis on protecting capital when both valuations and market action are unfavorable.
Market action conveys an enormous amount of information. Most of this is conveyed not simply by obvious trends, but in more subtle ways – particularly how various elements of market action diverge from how they would be expected to behave, given the surrounding context.
In short, market action involves more than just obvious trends in major averages. We strongly believe that market action conveys information held by millions of other traders – not only about broad economic trends, but also about their own personal situations (income improvements, job losses, risk preferences, etc). Market action distills all of this information in ways beyond what can be conveyed by government statistics. Our interest is in measuring this information content – to gauge the quality of market action, not simply to chase raw and obvious market trends that may or may not have run their course.
The term “Market Climate” and associated graphics are service marks of the Hussman Funds.
Each unique combination of valuation, market action and other market conditions produces a specific “Market Climate”, with its own average historical profile of expected return and risk.
The intent of our approach is not to “predict” market direction. Rather, the intent of this approach is to classify prevailing investment conditions with those historical instances having the greatest similarity, and to accept those investment risks that we believe are expected to be compensated by high returns, on average, while attempting to systematically avoid, hedge, or diversify away those risks which have historically not been compensated.
A useful analogy is to think of the market as a hat with both positive and negative returns in it. Buy-and-hold investors in stocks essentially believe that those returns are in the 10-11% annual range, but that they can’t be predicted. Market timers, on the other hand, do think those returns can be predicted, and spend most of their time trying to forecast whether the next draw from the hat will be a gain or a loss.
We believe neither. Very simply, we believe that there are different hats. And each hat has a unique return/risk profile. If the hat is associated with a favorable historical tradeoff between expected return and risk, we are willing to take a constructive market position. If the hat is associated with an unfavorable tradeoff, we are defensive. While we believe that it is possible to identify the hat in front of us based on objective evidence, we do not believe we have the further ability to forecast whether the next draw from the hat will be an advance or a decline.
We believe that market valuations strongly determine the likely return that investors can expect over the long-term, and the potential risk they may experience over the completion of any given market cycle. However, we don’t believe that short-term market direction can be consistently or reliably predicted. Instead, we believe that some market conditions may have a higher average return/risk tradeoff than others, and that these conditions can be identified in a disciplined way. It is virtually impossible to reduce that average behavior into reliably accurate forecasts for specific periods of time.
Our discipline does not require us to predict the future. Rather, we attempt to objectively identify the present. Our intent is to hold a position that is consistent with the Market Climate prevailing at any given time. The Market Climate is not a formula but a method of analysis. The investment manager has sole discretion in the measurement and interpretation of market conditions.
It is possible to sail a boat to any destination, simply by adjusting the sails to the prevailing wind. No forecast is required except a general belief that the direction of the next gust is not completely random. While we often have very strong views about long-term and full-cycle market outcomes (based on valuation measures that we find strongly correlated with those outcomes in market cycles across history), we rarely have pointed short-term market expectations. As a technical matter, we identify the Market Climate on a weekly basis, though we are willing to act intra-week if conditions warrant. It would be completely correct to say that we have a small, statistically insignificant, and unreliable forecast about market direction for the coming week, and no short-term forecast beyond that. For practical purposes, we do not believe that such forecasts are necessary.
A Note on Discipline
We believe that the most successful investors share a common trait: discipline. It is important for shareholders to understand that we place a rigid emphasis on disciplined strategy. We believe that the key to superior long-term returns is to take investment opportunities when the evidence suggests high return/risk tradeoffs on average, and to avoid situations when the evidence suggests low return/risk tradeoffs on average.
Unfortunately, what holds true on average may not hold true in any specific case. All of the Market Climates we consider may experience short-term returns which are both positive and negative. As a result, we may occasionally be defensive during rallies that occur in a negative Market Climate, and aggressive during declines that occur in a favorable Market Climate. These instances may include both small and large market moves. We may occasionally be underweighted in securities or industry groups that are advancing despite negative characteristics, and overweighted in securities or industry groups that are declining despite positive characteristics.
These instances should be expected from time to time. They may seem unfortunate, but they are not predictable. Though we certainly attempt to limit our risks through diversification, careful hedging, and appropriate position sizes, we do not attempt to “correct” short-term difficulties if we would have to ignore our strategy to do so.
It is important for shareholders to understand that we do not try to “time” specific market advances and declines, or alter our position based solely on adverse movements over limited segments of the complete market cycle.
Read our Prospectus
The Prospectus of each Fund contains more information in a detailed, easy-to-read format, including information about fees and expenses. You can learn more about our research and market perspectives in the Market Comment and Research & Insight areas of this website.
We consistently attempt to position the Funds in line with the prevailing Market Climate. So regardless of current market conditions, we believe that now is a good time to invest in the Hussman Funds. Account Applications for the Funds can be downloaded online. These materials may also be obtained by calling us at 1-800-487-7626.
Thank you for your interest in the Hussman Funds. We look forward to being a valuable and disciplined part of your investment program.