For many investors, the phrase "conservative technology fund" might seem like a bigger oxymoron than jumbo shrimp.

But some recently opened funds are striving to be just that -- a conservative alternative to investing in the rocky technology sector. This year's selloff in tech stocks has brought an abrupt ending to the triple-digit gains that many technology funds saw last year. Now some fund companies are offering investors a chance to capture some of the upside of the tech boom, while using hedging strategies such as

options and convertible bonds that spare investors the precipitous drops.

While there are still attendant risks, and the costs of implementing such strategies mean you won't get as much juice on the upside, in a year like this one has been so far, you might be happy to pay for the insurance.

One such fund, the $23 million

(KSECX)

Kelmoore Strategy Eagle fund, which owns technology, communications and financial stocks, tries to smooth over the bumpy rides of tech holdings like

Yahoo!

(YHOO)

and

Microsoft

(MSFT) - Get Report

by selling covered call options against substantially all of the shares of stock the fund owns.

Writing a covered option is a strategy in which one sells a

call or a

put option while owning the same amount of the underlying stocks at the same time. So when the option expires, the buyer can decide whether to exercise the option, depending on the stock's price.

With this strategy, the fund generates a steady stream of income from the premiums earned from writing the options, which it then pays out in monthly dividends to shareholders. Since the Eagle fund's inception in July, it has paid $1.27 a share to shareholders, says Kelmoore portfolio manager Matthew Kelmon, who adds that the fund's goal is to yield a return of 30% to shareholders annually.

"This fund is for anyone looking to own some outstanding tech and finance stocks in a conservative manner," says Kelmon.

From its inception through the end of October, the young fund lost 13.2%, slightly outperforming the 14.2% drop on the

Nasdaq Composite Index for the same period. Kelmon says the fund performs best in steady, slightly declining or slightly rising markets, noting that because of the call options, the fund will often miss out on huge bull rallies.

The fund is also expected to have a turnover rate of 250% this year, and much of the fund's capital gains are short-term, and therefore taxed at the investor's regular income tax rate. The fund's A shares have a 5.5%

front-end load, while the C shares have a 1% annual

12b-1, or marketing, fee.

Another way to reduce risk is through a convertible bond fund. Sensing investors' uneasiness over this year's tech stock gyrations, firms such as

Ariston Asset Management

and

Calamos Asset Management

have launched convertible technology funds this year.

A convertible bond is one that pays investors a fixed rate but also gives them the option to convert the bonds into stock at a fixed price. So, if the issuing company's stock rises to a certain level, the bondholder can opt to exchange the bond for stock. Conversely, if the stock price plummets, the investor has the security of receiving the fixed rate that the bond pays. Because of the cushion they provide, the securities pay less interest than nonconvertible bonds and trade at lower levels than common stock. Convertible bonds are often popular with start-ups because they offer inexpensive financing and they allow companies to wipe debt off their books by exchanging the bonds for stock.

Essentially, with a convertible bond, instead of owning the stock directly, you're loaning the company money. While corporate debt insulates you from some of the stock volatility, there is always the risk that the company will default on its debt, which is bad. But, hypothetically, a convertible-bond tech fund should be diversified enough to protect investors from one such blowup.

Historically, convertible bonds have returned to investors about 70% of what the stock returned on the upside -- so, you're paying in the good times for that extra security you get on the way down.

"If you compared convertibles to a tech fund, they shouldn't lose as much during downturns," says

Morningstar

analyst William Harding.

A look at this year's performance proves that adage, with convertible bond funds up 4.4% year to date compared with technology funds' 9.5% drop. However, technology funds have fared better longer term, posting 33%, 44% and 29% gains for the one-, three- and five-year periods, respectively, while convertible funds have gained 21%, 12% and 15% for the same periods, according to Morningstar.

That said, outperforming technology funds is not the goal for convertible-bond fund managers. Their aim is to give investors exposure to the fast-growing technology sector while letting them sleep at night.

The $3 million

Calamos Convertible Technology Fund

, for example, is down 5.1% since its Aug. 24 inception, compared with the 16.8% drop on the Nasdaq for the same period. The fund holds convertible securities from companies like

Aether Systems

(AETH)

and

Cypress Semiconductor

(CY) - Get Report

. A firm believer in the future of technology, senior portfolio manager Nick Calamos says he believes tech stocks still could be in for more volatility.

"We think the best way to keep people in on this long-term opportunity is to invest with a little more comfort and a little less upside; a convertible fund can do that," says Calamos.

Ariston vice president and analyst Daniel Jacoy agrees. Although the $1 million

(AICEX)

Ariston Internet Convertible Fund is down 4.1% since its May 1 inception, the fund has outperformed the 14.2% drop on the Nasdaq.

"The returns tell a story of the downside protection," says Jacoy.

While the convertible feature offers an attractive buffer in down markets, that doesn't mean investors shouldn't do their homework. Because convertibles are a favored method of financing start-ups, investors should look closely at the credit quality of the companies a fund holds. And just because the bond cushion exists, this doesn't mean the convertible security won't get hit hard if the underlying stock gets walloped, say analysts.

"Folks shouldn't think they're going to swallow a magic pill that's going to get them the upside without the volatility that comes along with that," says Morningstar analyst Christopher Traulsen.