A market like last week's is enough to make anyone dream of being a short-seller.

To fulfill that fantasy, you can find a variety of mutual funds that consistently short stocks. You see the catchy names, like

(BEARX) - Get Report

Prudent Bear and

(RYURX) - Get Report

Rydex Ursa, atop the lists of best-performing funds every time the market takes a beating.

Then, inevitably, the market bounces back, as it did on Monday when the

Nasdaq Composite

gained 6.6%, and their sudden celebrity fades quickly. At least, that's the scenario of the last few years.

Depending on your outlook and your taste for risk, there could be a place for shorting in your mutual fund portfolio.

Investing in a short fund can be either a conservative or a speculative move. If your investment in a short fund matches a long position, you are hedging some of your market risk. If you're purely short, you are taking on the same sort of market risk that you do when you go "long" a regular mutual fund.

Not all short funds are alike. Some managers, like Prudent Bear's David Tice, strongly feel the market is overvalued and are positioned for the drop they believe is inevitable. Other funds are simply negative indices, poised to rise in proportion to the market's fall. And a third category includes funds that are mostly long, but try to use shorting selectively and opportunistically.

We'll look at all three categories, but first, a short definition of shorting: When you short a stock or a basket of stocks, you're betting it will fall in price. In a short sale, an investor borrows securities from a broker and sells them into the market with the understanding that the shares will be bought back and returned to the broker at a later date. If the stock falls, the investor buys back the stock at a cheaper price, making money on the trade. If the stock rises, the investor must fork over more cash to buy it back, thereby losing money.

Since the market inevitably rises over time, you won't find a money manager or financial planner who sees shorting as anything but a tactical move.

"It's hard to see how a long-term short position is probably going to be a winner," says Weston Wellington, a vice president at fund manager

Dimensional Fund Advisors

in Santa Monica, Calif.

Still, let's take a look at the dark side and some different strategies employed by managers who short.

Full-Time Bears

The Prudent Bear fund and the

(DRCVX) - Get Report

Comstock Partners Capital Value fund are run by long-term bears.

These funds can own stocks long, but the managers rarely do. They actively make bets in various sectors, stocks and other securities that they believe will benefit if the market collapses because that's what they think will happen.

They have been wrong, for the most part, for a long time, and returns on these funds easily confirm this. Over the past three years, the funds have fallen, on average, 18% and 25.3% a year, respectively.

Prudent Bear Manager David Tice has thought the market was poised for failure since he started running this fund in the mid-1990s. The fund shorts individual stocks and index futures and buys puts on indices and individual stocks.

"I can't wait to be bullish again. I know more money can be made on the long side." Tice says. But "the market environment says we need to be defensive."

For Tice to change his thinking, the

S&P 500

will have to crumble more than 50% from current levels and the

Nasdaq

will have to fall another 60% to 70%, he says.

Until then, Tice will keep his usual course. Right now, 70% of the Prudent Bear fund's assets are short. "That is pretty typical. We don't vary it that dramatically."

The fund is always short some technology, Internet, financials, brokerage and outrageously valued initial public offerings. (The fund's long positions are typically defensive plays like gold and silver mining companies.)

Over the past three or four weeks, however, Tice does admit that he has been more negative. "We were in the la-la land stage with tech stocks."

Among Tice's short positions are

B2B HOLDRs

(BHH)

, exchange-traded

baskets of 20 business-to-business Internet stocks. These HOLDRs were down more than 60% from their February introduction through Friday. "We believe most Internet companies have flawed business models and will never make a profit. There have been such a euphoria and pyramid scheme about investing in these companies. The valuations are so extreme they should be sold," says Tice.

The folks running the Comstock Capital Value fund are even more pessimistic. Co-manager Martin Weiner says 115% of the fund is short. "We don't own any stock long as we have in the past."

The 100%-plus short position is achieved by owning put options on the S&P 500 index. A put option gives you the right to sell a security at a specific price and is a bet that a stock will fall. The fund has about 7% of its assets in puts, but because of the leverage involved, this is equivalent to a 73% short exposure, says Weiner. Beyond that, he won't mention specific names, but the fund is short a lot of Internet stocks plus computer and communications companies.

Negative Index

Some short funds are simply inversely correlated to a particular index, like the S&P 500 or the

Nasdaq 100

. If an index goes up 5%, the fund should go down 5%.

Rydex

offers these funds. So does the

ProFunds

group.

ProFunds also offers an

(USPIX) - Get Report

UltraShort OTC fund that is supposed to deliver returns that are twice the inverse performance of the Nasdaq 100. So if the Nasdaq 100 falls 10%, UltraShort OTC should rise 20%. And vice versa.

Rydex Ursa fund is inversely correlated to the S&P 500.

(RYAIX) - Get Report

Rydex Arktos moves in the opposite direction as the Nasdaq 100. The managers short stocks and use futures and options to deliver this performance. The Arktos fund, for example, is down 48.4% over the past year, while the

Nasdaq 100 tracking stock

(QQQ) - Get Report

is up 79.7%.

These funds seem ideal for market-timers -- people who are trying to call the short-term direction of a market or sector. Mike Byrum, vice president of investments at Rydex, says a lot of Rydex investors are actually worried about volatility and use the funds to temper the tech exposure in their portfolios.

"Our shareholders are looking for consistency of performance and are not looking to take bets on where the market is going," says Byrum. "We don't position the short funds as buy-and-hold funds. The Ursa and Arktos are really designed for people who want to hedge particular movements in the markets."

Short Profits

Some mutual funds -- very much like hedge funds -- are not bearish, but short some individual securities purely to make a profit.

Take three of the

AIM

funds. The

AIM Large Cap Opportunities

,

(AMCOX)

Mid Cap Opportunities and

(ASCOX)

Small Cap Opportunities funds all have some short positions in selected stocks. (Mid Cap Opportunities and Small Cap Opportunities are closed to new investors.) Their managers are bottom-up stock pickers, both on the long side and the short side. That means they examine companies one by one rather than buying sectors or trends.

The Small Cap Opportunities fund, the oldest of the three, has a one-year return of 89%, which puts it ahead of 95% of its small-cap growth peers, according to

Morningstar

.

Most of those gains are from the long side. Brant DeMuth, one of the managers on the three funds, says only about 10% to 12% of each fund's assets are short. In fact, he says there is no plethora of short prospects.

"We aren't seeing any more opportunity now than, say, six months ago," says DeMuth. "We're seeing good earnings, which typically means lower short positions. If we saw more earnings disasters, we would be more short."

What are the managers shorting? DeMuth says they are looking at older economy stocks that have gotten a lift but haven't gotten better fundamentally, some specialty pharmaceutical companies and financial stocks. As a group, banks have run up over 13% since the end of February as have pharmaceuticals.

Send your questions and comments, along with your full name, to

deardagen@thestreet.com.

Dear Dagen aims to provide general fund information. Under no circumstances does the information in this column represent a recommendation to buy or sell funds or other securities.