Everyman Hedge Funds for Bear Markets

For moderate fees, consider alternative mutual funds from Rydex Investments. Rydex Alternative Strategies(RYFDX Quote) charges an expense ratio of 1.76% and invests in a mix of strategies, including commodities and short selling.

For newcomers who want to dip a toe in the hedge waters, consider Bridgeway Balanced Fund(BRBPX Quote), which has an expense ratio of 0.88%. The mutual fund puts most of its assets in Treasury bills and stocks that track the S&P 500. In addition, portfolio manager Dick Cancelmo uses options trading to gain some income and protect against downturns. The aim of the strategy is to deliver 40% of the gains of the S&P 500 when the market rises, and 40% of the losses in downturns. "This is an alternative for investors who only want to take a limited amount of risk," Cancelmo says.

So far, Bridgeway has been on target, outperforming the benchmark in downturns and delivering part of the market's upside in good years. In 2006, the S&P 500 gained 16%, and Bridgeway returned 6.7%. In 2008, Bridgeway lost 19%, surpassing the S&P 500 by a wide margin. The fund has returned 1.2% annually during the five years ending in May, compared with minus 2% for the S&P 500.

For cautious investors who want to obtain some market appreciation without risking a repeat of last year, Bridgeway and some of the other funds that hedge could be intriguing choices. Those who have never used a hedge fund before should start slowly, putting a small percentage of assets into a mutual fund that may help to cushion downturns.