MattAndrejczak

SAN FRANCISCO (MarketWatch) — Behind the Numbers, an independent research firm known for warning investors about potential problems at public companies, plans to launch a hedge fund in July.

To be called “The Short Fund,” the hedge fund intends to short 10 to 15 companies while taking long positions in five to eight companies, according to BTN President Jeff Middleswart, who will run the fund.

“We are here primarily to identify weak companies and short-sell them,” the firm said in a pitch document obtained by MarketWatch.

Hedge funds focused on short selling have been liquidating after the stock market’s surge since March 2009 burned them. Industry tracker HedgeFund.net saw seven short-biased managers drop out of its index in 2010, leaving 24 funds focused on the strategy. Only four short sellers report to the Strunk Short Index, down from 15 in the mid-1990s.

In an interview, Middleswart said his “basic goal is to reduce total risk” for investors. He hopes to raise at least $50 million this year.

The Short Fund will not trade excessively or look to profit on a one-time quarterly earnings miss, instead taking a longer-term approach.

For instance, short candidates could be companies that BTN thinks are undergoing a structural business decline, those where the dividend is at risk of being cut, or those where cash flows and revenues are falling.

Long positions could be taken on companies that are turn-around plays and companies that may significantly grow their dividend in the near to mid term. Ideal candidates would be companies BTN warned investors of in the past and knows well.

The Short Fund doesn’t plan to invest in the Standard & Poor’s Dividends Aristocrats Index, the roughly 40 members of the S&P 500 that have raised dividends every year for at least the last 25 consecutive years.

The fund will look at many companies in the S&P 500 Index and look to offer protection against those index components that decline in value in any given year.

The idea is that this short-long strategy works better than buying an index put option on the S&P 500. A put option is a bet that a stock or index will decline in value. In most years, the S&P advances, making an index put a money-losing investment over time, BTN contends.

The goal is to “be an actual hedge fund,” BTN said in its proposal paper. “Too many funds try to be everything and trade currencies, credit defaults, microcap stocks. “

The minimum investment for The Short Fund will likely be $250,000 to $1 million, depending on the investor.

Dallas-based BTN, established in 1988, is best known for putting sell recommendations on companies. Its research is bought by hedge funds as well as managers at mutual and pension funds.

Among other warnings, BTN cautioned investors about possible accounting irregularities at Tyco International in 1999. Government regulators eventually filed charges against Tyco and its top executives.

Middleswart, 41, has never run a hedge fund.

In February 2010, he took over stewardship of the Vice Fund VICEX, -0.89%  , a mutual fund that invests in tobacco, alcohol, and defense companies, such as Philip Morris and General Dynamics.

So far in 2011, the VICE fund is up 13% compared to the 5% gain for the S&P 500.