One area of confusion, according to analysts, is that the inverse funds may be more useful to short-term traders than long-term investors.

That's because most of these funds aim to accomplish their objective-say, matching the inverse of the performance of a certain bond index or some multiple of the inverse-on a daily or monthly basis. Over longer periods, because of the effects of compounding, their cumulative returns can be much different than what one might expect.

Take ProShares UltraShort 20+ Year Treasury. This ETF seeks daily investment results of twice the opposite of the daily performance of the Barclays Capital U.S. Treasury 20+ Year Index. In the third quarter, when the index was up 4.99%, the ProShares ETF was down not twice that, or 9.98%, but nearly 2½ times that, or 12.4%.

In 2009, when the bond index fell 21.4%, the ProShares leveraged-inverse fund rose not twice that, or 42.8%, but 1½ times that, or 32.2%.
Another example is Rydex-SGI Inverse Government Long Bond Strategy. In 2009, this inverse mutual fund rose more than its benchmark fell; in 2008, it lost more than the index gained.

Eoin Treacy's view Many investors rather than reading prospectuses appear to conclude that just because an instrument has 'fund' attached to the end of the title that it affords the same sense of security as any other mutual fund. This is simply not the case. The advent of exchange traded funds over the last decade has given access to a huge number of instruments and markets that were not previously available to the regular investor, including but not limited to leverage, derivatives and futures.

Inverse funds and leveraged inverse funds, often on futures contracts, are instruments that are more suited to investors with a trading mentality. One really does have to understand just what one is purchasing before entering into such a trade. Personally, I am not exactly clear what the benefit of these funds is over the regular futures markets since in either case one is dealing with leverage and derivatives.