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.

Concepts
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.)

Conclusion
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.

Tickers in this Article: DXD, TWM

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