Rydex has something (the Vulture* 100?) that shorts the NASDAQ, and that brought this issue up on the bored a month or two ago. The fund's performance during the fall and rise of the naz from/to 2000 was disturbing: lost something like 40% over three years, at equal index.
I made up some simple balance sheets for a short fund and the problem is that selling fund shares at the NAV doesn't preserve shareholders' effective sale price for the index. If the fund grows while the index wanders up or down and finally back to your entry value, then you've lost NAV.
So you not only have to guard against a rise in the index that you're betting against; you can also lose big money merely through sale of new shares in the fund followed by a return to the neighborhood of your entry index value.
To make money on an open short fund, you need either a nearly monotonic wiggle-free fall in the index (or bond price), or *shrinking* total deposits in the fund.
Very disturbing: viciously slanted yet I can't even figure out how to screw it safely. Heh, maybe short it.
*well, ok, I think it's really called "Venture 100"