If you're avoiding looking at your latest statement of account, rest assured that you are not alone. No one enjoys a bear market, but there are ways to protect your portfolio. To accomplish this investors will have to think creatively and become familiar with non-traditional investments that most people ignore. Long/short and market-neutral funds, once the exclusive domain of hedge funds, allow regular investors to smooth out the volatility in their portfolios.

A long/short fund typically buys stock positions and holds them for the long term while simultaneously selling borrowed shares of company stock in an attempt to make a profit by repurchasing them at a lower price in the future. A market neutral fund, as the name suggests, attempts to move in the opposite direction of the U.S. stock market by layering multiple investment strategies.

Next let's examine a few fund using these advanced strategies. (For further reading, check out Hedge Funds Go Retail.)

Aberdeen Equity Long-Short Fund (MLSAX)
This fund holds long stock positions while holding a basket of short-selling-focused exchange traded funds.The UltraShort Dow30 ProShares ETF (AMEX:DXD) and the UltraShort Russell 2000 ProShares ETF (AMEX:TWM) are the funds top two short focused holdings. The fund's long positions are concentrated in IT hardware, healthcare and industrial materials industries. This fund carries a high expense ratio of 2.53%. Year-to-date, MLSAX is down 1.63% compared to the S&P 500 which is down approximately 16%. (To learn how these specialty investment vehicles offer dramatic results, read Rebound Quickly With Leveraged ETFs.)

TFS Market Neutral (TFSMX)
The TFSMX fund is a mixed bag of investments. In addition to employing the long/short strategy it also has liberty to use options, futures and other derivatives to avoid being correlated to the U.S. market. The fund's long positions are concentrated in energy, industrial materials and financial services, while its largest short positions are in consumer services. This fund has no upfront load fee, but it does carry a high expense ratio of 2.58%. Year-to-date, TFSMX is up 6%.

Diamond Hill Long-Short Fund (DIAMX)
The DIAMX Fund is long energy, industrials, financial services and healthcare industries while simultaneously being short consumer services, consumer goods and healthcare. Among the three funds we will discuss, DIAMX has the lowest expense ratio at 1.48%. Investors should read a fund's prospectus to become aware of expenses that can eat into returns. Year-to-date, the fund is down 5.45%. According to Morningstar.com DIAMX is currently closed to new investors, but it may reopen in the future. (To learn how to minimize this impact of fees, read Stop Paying High Mutual Fund Fees.)

Drastic measures are not recommended, but an allocation of 5% to 10%, depending on your risk tolerance, could prove beneficial, especially after the U.S. market has recovered. As painful as it may be to tear open that envelop or click open your account statement, taking action to steady your portfolio can surely ease the tension surrounding falling markets in the future.

For another alternative, read Fund Of Funds - High Society For The Little Guy.

Related Articles
  1. Stock Analysis

    Allstate: How Being Boring Earns it Billions (ALL)

    A summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
  2. Chart Advisor

    Copper Continues Its Descent

    Copper prices have been under pressure lately and based on these charts it doesn't seem that it will reverse any time soon.
  3. Credit & Loans

    Pre-Qualified Vs. Pre-Approved - What's The Difference?

    These terms may sound the same, but they mean very different things for homebuyers.
  4. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  5. Insurance

    Cashing in Your Life Insurance Policy

    Tough times call for desperate measures, but is raiding your life insurance policy even worth considering?
  6. Mutual Funds & ETFs

    Buying Vanguard Mutual Funds Vs. ETFs

    Learn about the differences between Vanguard's mutual fund and ETF products, and discover which may be more appropriate for investors.
  7. Mutual Funds & ETFs

    ETFs Vs. Mutual Funds: Choosing For Your Retirement

    Learn about the difference between using mutual funds versus ETFs for retirement, including which investment strategies and goals are best served by each.
  8. Mutual Funds & ETFs

    How to Reinvest Dividends from ETFs

    Learn about reinvesting ETF dividends, including the benefits and drawbacks of dividend reinvestment plans (DRIPs) and manual reinvestment.
  9. Investing Basics

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  10. Fundamental Analysis

    Using Decision Trees In Finance

    A decision tree provides a comprehensive framework to review the alternative scenarios and consequences a decision may lead to.
  1. Can hedge funds trade penny stocks?

    Hedge funds can trade penny stocks. In fact, hedge funds can trade in just about any type of security, including medium- ... Read Full Answer >>
  2. Are hedge funds regulated by FINRA?

    Alternative investment vehicles such as hedge funds offer investors a wider range of possibilities due to certain exceptions ... Read Full Answer >>
  3. Should mutual funds be subject to more regulation?

    Mutual funds, when compared to other types of pooled investments such as hedge funds, have very strict regulations. In fact, ... Read Full Answer >>
  4. Can hedge fund returns be replicated?

    You can replicate hedge fund returns to a degree but not perfectly. Most replication strategies underperform hedge funds ... Read Full Answer >>
  5. Can foreign investors invest in US hedge funds?

    U.S. hedge funds are open to accredited investors. When they distribute profits to investors, those proceeds are taxed at ... Read Full Answer >>
  6. Do hedge funds manipulate stock prices?

    Some economics professors think there is evidence of manipulation of certain stocks by hedge funds on key reporting days. ... Read Full Answer >>

You May Also Like

Trading Center