Dover Fund Holds Up to Stress Test

In my three years with TheStreet.com, I have written many articles about products like Rydex Managed Futures Fund(RYMFX Quote) and Nakoma Absolute Return Fund(NARFX Quote) as tools that offer protection in bear markets and a way to manage portfolio volatility. A new name for this list might be the Dover Long Short Sector Fund(DLSAX Quote).

There are plenty of long-short and absolute return funds, but only a few have offered meaningful protection in 2008. DLSAX has been a snoozer of a fund this year, which is a good thing. It's on the way to a very small gain, compared with a 45% decline for the S&P 500.

The fund builds long and short positions consistent with the team's research of sector and global-macro themes. The sector process mainly revolves around building a case for earnings, with comparisons to the street's consensus. If the street is too conservative, the team might go long; too aggressive, then go short.

At the global-macro level, the fund gives the example of exploiting a preference for alternative energy by either going long stocks in the group or shorting companies overly reliant on fossil fuels. As of Oct. 31, the fund's longs included alternative energy, water, agriculture, staples and biotech. The shorts included REITs, tech and industrials. (It has longs in industrials too.)

The individual holdings are mostly stocks, but there are also a few ETFs like the PowerShares Water Portfolio(PHO Quote) and the Rydex Japanese Yen Currency Shares(FXY Quote). I like the fact that some ETFs are used because this shows a willingness to seek out whatever tool the team thinks best ties in with its analysis. PHO may or may not be the best way to invest in water, but the managers obviously think it is.