If imitation is the highest form of flattery, then

Rydex

should be blushing. Instead, the Rockville, Md.-based fund company has been watching its back and taking a page out of its imitators' book.

Since launching in 1993 as a haven for active traders who live and die by split-second market timing -- the $8.5 billion in assets the fund company owns -- has inspired two competitors created by defectors from within its own ranks. Now, as one of the upstart defectors is nipping at Rydex's heels, the fund complex and its rivals are furiously rolling out new products aimed at poaching the others' key funds. In the process, they are becoming more and more alike each day.

ProFunds

, a $2.5 billion upstart, last week made a strike at Rydex by filing for 17 sector funds -- the exact number that Rydex has, covering many of the same industries. Not to be outdone, Rydex announced this week that it is launching two leveraged international index funds just like ProFunds has, albeit using different indices. And Rydex will roll out a twice-leveraged

Nasdaq 100

fund within days, mimicking ProFunds' largest offering. The younger company has plans to introduce an unleveraged Nasdaq 100 fund -- copying guess who?

Meanwhile,

Potomac

, another fund company with leveraged index funds, is a distant third in the race for fast traders with just $350 million in assets. It distinguished itself by bringing out unusual leveraged indices with hardly any funds based on them -- such as the

Dow Jones Industrial Average

and the

Dow Jones Internet

index. It has the smallest inventory of funds than either of its competitors.

According to advisers who do business with all three, the competition between Rydex and ProFunds has grown fierce in recent months as each company brings out new products to lure the active trader. But the bad blood that characterized Potomac and ProFunds' first days of operation has abated somewhat. Founders Tim Hagen of Potomac, and Michael Sapir of ProFunds, both had high-level posts at Rydex, where they learned the tricks of the trade.

"It's really easy for (the companies) to focus on exactly who the enemy is,'' says Paul Merriman, president of a

FundAdvice.com

, a Web site for market timers.

Officials from Rydex acknowledge that they keep an eye on their competition. "Of course we're watching what our competitors do, but we're not looking in the rearview mirror,'' says Nancy McCarthy, Rydex's director of marketing.

And ProFunds Chairman Sapir had a similar reaction. "There's always been a healthy level of competition between the two.''

ProFunds and Rydex have earned themselves a respected reputation among active traders because they make it easy to move in and out of markets and sectors. While other fund families have declared war on quick- trigger traders, these complexes give them the green light. There aren't any loads, transaction costs, redemption fees or trading restrictions. And trades can be placed minutes before the market closes. Many active traders prefer to use the index funds because they are more efficient and less time consuming than using individual stocks. Plus, the companies also allow an investor to short most of the indices.

With their moves, ProFunds and Rydex hope to eat into their rival's respective strongholds. ProFunds aims to put a dent in Rydex's advantage in attracting rapid-fire sector rotators with its sector funds. Rydex, meanwhile, is giving aggressive traders an alternative option for heavily leveraged index funds.

So, with all this imitation going on, what's the difference between Rydex and ProFunds?

"ProFunds is in a real follower position,'' says money manager Sam Jones of

R.E. Jones & Co.

in Denver. He prefers Rydex because the company consults with advisers on new fund launches.

Rydex has a loyal following among financial planners and advisers who were its early investors. And ProFunds and Potomac still face some challenges as they establish themselves. One adviser says ProFunds is understaffed and overworked, keeping investors on hold for several minutes -- time that's crucial to market timers.

Sapir says ProFunds is working on the problem. It introduced Web trading late last year and hired additional operators. "We're hiring to keep up with the growth,'' he says.

ProFunds, with its two-times leverage, is the more aggressive option. Those funds will rise or decline twice as much as the underlying stocks they invest in on any given day. Rydex has funds using leverage at one-and-a-half times and Potomac, of Alexandria, Va., has a more modest one-and-a-quarter.

There's more than enough business to go around, advisers say. The recent market slides gave both fund families a boost of visibility as their short funds provided places to hide. The short funds that also had leverage did even better.

"As the Nasdaq exploded over the past year and when you add leverage, these funds show up at the top of every performance list,'' says Jerry Wagner, a money manager at

Flexible Plan Investment

in Bloomfield Hills, Mich.

In 1999, for example, the Nasdaq 100 index rose 102% and the

(UOPIX) - Get Report

Profund UltraOTC, rose 233%, landing it in the first percentile among large-growth funds. The

(RYNVX) - Get Report

Rydex Nova fund, which matches the

S&P 500

index one-and-a-half times, rose 24%, beating almost three-quarters of its large blend competitors.