Best Funds for a Cautious Market Re-Entry

A mutual fund that combines different investment categories in "hybrid" vehicles might sound like a good idea to an investor hopeful of a market rebound but wishing for a muted exposure to equities.

But someone tempted by hybrid funds as investments for these treacherous times should check their performance in August, when stock prices were still rising. Four of the five hybrid fund classes tracked by TheStreet.com Ratings dropped in August, as can be seen in the left column in the accompanying table.

Nonetheless, a carefully chosen hybrid fund might be worth considering for someone convinced that the end of the investment world isn't at hand, but maybe a cautious reentry would be prudent.

In addition to the group averages, the table lists last month's top performer in each hybrid fund category.

Although most "asset allocation" funds portion their investments between stocks and bonds, the best fund in that group was recently 41% in cash and equivalents, with most of the remainder invested in long and short equities. The 1st Source Long/Short Fund(FMLSX Quote), Everyman's version of a hedge fund, jumped 3.4% in August to cap an advance of 5.4% during the past 12 months. It has rewarded its holders with a relatively low-volatility annual return of 8.2% over three years.

FMLSX, which will soon be part of the Wasatch Advisors family, has portfolio positions in such diverse companies as Waste Management(WMI Quote), Steak n Shake(SNS Quote), Spectra Energy(SE Quote) and Wal-Mart Stores(WMT Quote).

The top performer in global asset allocation, the UBS Dynamic Alpha A Fund(BNAAX Quote) bounced 2.9% in August but remains underwater by 3.4% for the past 12 months. Recently 70% in cash, 13% in stocks and 4% in bonds, the fund's three-year compound return is an anemic 2.6%. Although its name contains "Alpha," which is indicative of a hedge fund wannabe, its portfolio is primarily comprised of UBS open-end investment companies, with no short positions indicated.