Mutual Funds That Act Like Hedge Funds

The 17 that met the above constraints are the antithesis of the "closet index" funds that I discussed in an earlier article. Most have returns that are virtually uncorrelated with the S&P 500, with beta coefficients within a hair of zero. In fact, five have R-squared values of zero, meaning no correlation with the market. These are the rugged individualists of open-end mutual funds, the Daniel Boones who shun the crowds, driven by the urge to fearlessly march off into terra incognita.

Moreover, the individualism of these funds hasn't resulted in inconsistent returns. The "hedge" in the concept conveys a degree of immunity from sinking markets. Some of the component funds boast three-year standard deviations considerably below the average of 10.21% for all open-end stock funds.

Of course, the steadiness of these returns comes at a price. While these hedge-fund-like mutual funds tend to make money in good times and bad, the returns tend to be on the modest side. This accounts for the equally uninspired grades earned by most in the group from TheSteet.com Ratings.

Another "cost" of the funds in the adjoining group is a higher-than-average mean group total expense ratio of 1.57%. Still, it pales next to the two-and-20 standard of the hedge-fund industry.

With names such as "Long-Short," "Market Neutral," "Hard Currency" and "L/S," seven of the funds are overtly declaring themselves to be in the hedge-fund domain. And even if, as individuals, they don't necessarily produce returns that are uncorrelated with the overall stock market, some of these funds could help diversify your portfolio. In addition to the currency fund, there is an energy fund, a Pacific Rim foreign-stock fund and two that focus on the real estate sector.

So if the SEC puts hedge funds out of your reach, don't worry. Investing in one of the funds on this list means you will still have something to boast about at your next cocktail party.