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NEW YORK (TheStreet) -- When markets crashed in 2008, most investments collapsed, but Rydex/SGI Managed Futures Strategy (RYMTX) - Get Free Report was among the few funds that stayed in the black.

For the year, this mutual fund returned 8.5%, outpacing the

S&P 500

by 45 percentage points.

At the time of the downturn, Rydex was the only mutual fund specializing in managed futures. But seeing its strong showing, other companies have entered field.

There are now 16 managed futures funds, according to Morningstar. The category has a total of $7 billion in assets. New entrants include

Altegris Managed Futures Strategy


AQR Managed Futures Strategy

(AQMIX) - Get Free Report


Natixis ASG Managed Futures Strategy


Some financial advisers have been recommending the funds, arguing that managed futures can help to diversify portfolios and protect assets during downturns.

The advisers point to the track record of the S&P DTI (Diversified Trends Indicator) benchmark, which tracks a managed futures strategy.

From 2004 through 2010, the S&P DTI returned 5.1% annually, compared to a return of 3.9% for the S&P 500. The futures benchmark often rose when stocks were falling. Since 2000, the S&P 500 has recorded four losing years -- and during each down year, the S&P DTI stayed in the black.

Managed futures strategies typically follow trends. When markets are rising, portfolio managers buy futures, betting that the trend will continue. When markets sink, managers take short positions, hoping that futures will fall.

The funds can have a broad range of holdings, including futures that track stocks and bonds as well as commodities such as sugar, cotton, precious metals and oil.

The futures funds do best when trends move in one direction for a prolonged period. That happened during the downturn of 2008. Beginning in the last two months of 2007, stocks began sinking, and they fell through most of the next year. That gave portfolio managers time to identify the trend and then ride it for profits. Other clear trends emerged in the second half of 2008, as oil prices sank and Treasury bonds soared.

Although futures strategies excel during steep downturns, the funds do less well when markets bounce up and down in erratic patterns. In those situations, there is no clear trend and funds can be whipsawed.

That happened in 2009. After falling sharply at the beginning of the year, stocks suddenly skyrocketed. Funds with short positions were slammed. For the year, the S&P DTI index lost 5.9%, while the S&P 500 returned 26.5%. So far this year, the S&P 500 has returned 6.7%, and all the managed futures funds have trailed as erratic market moves have hurt their results.

Now that so many funds are trading futures, will trend-following continue to work? AQR managers argue that the futures strategies will succeed because of the principles of behavioral finance discovered by Daniel Kahneman and Amos Tversky, who were awarded the Nobel Prize in economics for their work on how people make decisions.

According to the researchers, investors adjust to changes in the market only gradually. That causes trends to persist.

For example, let's say cotton prices start to rise because of a shortage of supplies. At first, many investors may react slowly, figuring that past prices will continue to prevail. The futures will increase only gradually as more investors accept the new reality and bid up prices. Because the changes happen slowly, traders have time to jump aboard and ride the trend.

The futures funds follow a range of strategies.

Rydex/SGI Managed Futures Strategy tracks the S&P DTI index. The index has half its assets in financial assets, including the yen, Swiss francs and U.S. Treasury bonds.

The rest of the portfolio is in commodities, including energy, industrial metals and livestock. The fund has no position in stock futures.

The absence of stock holdings ensures that the fund will provide important diversification, says John Cadigan, managing director of Rydex/SGI. "If you introduce equities strategies, you increase the correlation with the stock market," says Cadigan.

A fund that focuses strictly on commodities is

Forward Commodity Long/Short Strategy

(FCOMX). It tracks the Credit Suisse Momentum and Volatility Enhanced Return Strategy, which takes long and short positions.

This year the fund has been the top-performing managed futures fund, returning 6.3%. The returns have been boosted by price rises in copper, nickel and oil. "We have been long industrial metals, and those have done well," says portfolio manager Nathan Rowader.

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Stan Luxenberg is a freelance writer specializing in mutual funds and investing. He was executive editor of Individual Investor magazine.