The long and short of the recent market tempest is that investors would have been better off in a long-short fund.

The hurricane hitting stocks over the past month has leveled nearly every category of mutual fund save bond and bear funds, which welcome such stormy skies. International, precious metal and natural resource funds have been particularly slammed after their rapid run-ups, with some falling by as much as 20%, according to fund tracker Morningstar. Meanwhile, growth funds of all sizes are down by close to double-digit percentages.

Long-short funds, which invest shareholder dollars exactly as their name implies, have been one of the only fund classes to weather the storm. The average long-short fund, says Morningstar, is down just 1.7% over the past month and, more importantly, is up 2.1% year to date, even as the

Nasdaq

and the

S&P 500

have been dancing with the red line for the year.

"There are inflation concerns, problems in the housing sector, a

Fed

in transition, budget deficits and a weak dollar," says Mike Arone, co-portfolio manager of the $20 million

(SDCQX)

SSgA Directional Core Equity fund. "Add all that up, and it becomes quite clear that now is the time to play defense, and long-short funds are a good way to do it."

Arone's fund, which is up 0.4% year to date, maintains a long bias, so it's affected by the market's tumble, but not as much as a long-only fund. For every $100 worth of stocks he buys, Arone sells short $30, giving the fund equity exposure of 70% to large-cap U.S. stocks. In order to maximize his overall return, Arone buys companies with strong free cash flow, sound balance sheets and strong earnings growth, and he shorts shares of companies with what he calls the "mirror image."

Barry James, portfolio manager for the $73 million

(JAMNX)

James Market Neutral fund, matches his long and short percentages, making his fund less susceptible to the market's violent mood swings, and he also holds some cash.

"We had a long run-up, and valuations became stretched, and long-short funds are an ideal vehicle when the macro outlook is this cloudy," says James.

In order to find his long and short candidates, James ranks 8,500 stocks according to a range of metrics, including valuation and earnings growth. After screening for potential winners and losers, he assesses their relative strength before putting them in his portfolio. Relative strength assesses the ability to go up more than the market when the market is going up, and vice versa on the downside.

James also says his midwestern sensibilities keep him from becoming overly aggressive on the short side, which is where the most damage can potentially occur.

"We cover shorts quickly so they don't get away from us," says James, whose fund is up 2.1% this year. "You have to set limits, or you can find yourself in big trouble."

Since long-short funds differ in market exposure and stock selection, Morningstar analyst Dan McNeela recommends that investors fully understand the strategies involved before purchasing a fund.

"Often times, people think they are buying a market-neutral fund, and that's just not the case," says McNeela. "And then when the market stumbles they wonder what went wrong."

McNeela suggests that investors research a fund's track record in both bull and bear markets, as well as pay close attention to expenses. The average expense ratio for long-short funds is 2.3%, according to Morningstar. That's about a full percentage point higher than the average equity fund; nevertheless, it's a bargain compared with the cost of a hedge fund running a similar strategy and taking 20% of the profits.

Another example of a long-biased fund is the $677 million

(DIAMX) - Get Report

Diamond Hill Long-Short fund. Diamond Hill is currently 45% net long, buying $80 worth of stocks for every $35 it sells short.

"We don't do pair trades like buying

Coca-Cola

(KO) - Get Report

and shorting an equal amount of

Pepsi

(PEP) - Get Report

," says fund manager Ric Dillon. "We try to make money on both sides so volatility is mitigated, but the fund is not riskless."

For example, the fund is long energy stocks including

Apache

(APA) - Get Report

,

ConocoPhillips

(COP) - Get Report

and

Devon Energy

(DVN) - Get Report

, yet it holds no offsetting energy shorts.

On the other side of the ledger, Dillon is short technology names such as

Cisco

(CSCO) - Get Report

and

Yahoo!

(YHOO)

.

"Energy stocks are still pricing in crude in the mid-$40-a-barrel range," says Dillon, whose fund is up 4% year to date. "Meanwhile, we believe the valuations in technology have not fully corrected from the Internet bubble."

As for whether a long-short fund should be a core holding, Vivienne Hsu, portfolio manager for the $667 million

(SWHIX)

Schwab Hedged Equity Investor fund, says, "These hedged funds are perfect for risk-averse investors or for those who want to supplement their large-cap fund with some downside protection."

Hsu specifically manages her fund to limit risk and lower volatility. The fund sports a beta of 0.5, meaning that if the market drops by 10%, then the fund should theoretically fall only 5%.

Or in other words, in the stormy weather we've been seeing, it's a chance to stay 50% dry when everybody else is getting 100% soaked.