win from losing.

At times like this, when the prevailing direction of the market is down, it's still possible to make money by shorting stocks, a tactic also known as short-selling.

To short a stock, you borrow shares and sell them, expecting to buy them back at a cheaper price down the road. The opposite of being short a stock is to be long, in which you buy shares expecting their value to rise.

Shorting can be a risky tactic. When you are long a stock, you can lose your entire investment if its price goes to zero. But when you are short a stock, you can lose your entire investment and then some because the price can theoretically rise forever.

"Shorting makes a lot more sense now, but if you haven't picked the right stock, it's not going to work," says Randall Roth, senior analyst on the


IPO Plus Aftermarket fund, which sometimes shorts new and recent issues that look less than promising.

Shorting can be used as a hedging or defensive tactic, or it can be used by aggressive profit-seekers. This week, we sifted for mutual funds with the biggest short positions. We screened out the funds that are always somewhat short, like market-neutral and bear funds, hoping to turn up the ones that use the strategy most artfully. Here's what we found.

It's fairly rare to find funds that have sizable short positions because they're somewhat taboo. Some investors aren't comfortable with the idea of betting against the market, particularly in recent years as growth stocks marched upward. Still, we turned up an interesting list. It includes several funds with unique strategies and above-average expenses, including three funds that are closed to new investors.

Let's start at the top. Technically, we should have screened out the

(MERFX) - Get Report

Merger fund because shorting is a core part of its strategy. But it's such a unique fund, we thought you should know about it in case it ever reopens to new investors. (It has been closed since August 1999.)

As you might imagine, the $797 million no-load fund focuses on merger-arbitrage situations. When a merger is announced, the stock of the target company typically rises, while the acquiring company's stock often falls. Consequently, the fund typically buys the stock of the target company and shorts the acquirer's stock, says co-manager Bonnie Smith, who has run the fund with Frederick Green since its January 1989 inception.

This strategy positions the fund to profit from the merger, while the short of the acquirer's stock protects the fund if the deal falls through. The fund targets 10% to 15% annual returns and it usually hits its mark. It has posted a 11.3% annualized return over the past 10 years, according to


. The fund's positive return in this tough year shows that its performance isn't correlated to the broader market.

Shareholders of the no-load


RS Contrarian fund are experiencing some of the risks of shorting. The global fund typically buys stocks that look undervalued, and can use up to 40% of its assets to short stocks that look overvalued. Unfortunately, that approach hasn't worked out so well. Over the past five years, the fund has a negative 3.7% annualized return, according to Morningstar. Adding insult to injury, the fund's annual expenses are 2.38%, noticeably above the 1.89% average for the category.

On the other hand, the three AIM funds on our list, each of which can commit up to 25% of their assets to shorts, have used that allowance wisely. The three young funds' six-member management team appears to have made the right calls on what to buy long and what to short.

The small- and mid-cap funds, launched in 1998 and 1999, rode big technology weightings to solid gains in 1999. The small-cap fund posted an 84% return last year, while the mid-cap rocketed to a 104% gain. But unlike most of their tech-heavy peers, they haven't come crashing back to Earth. Their shorts might have been the difference.

"The funds' ability to short is probably a real asset that a lot of people don't know about," says AIM spokesman John Roehm.

Keep in mind that the broker-sold funds aren't necessarily the cheapest on the shelf, and the large-cap fund is the only member of the trio that's currently open to new investors. But if you're looking for a fund that's had success using shorts because you want some insurance in a selloff, it's worth a look. Launched at the end of last year, the fund has held its own through this year's storm.

Just because a fund shorts stocks doesn't necessarily mean it won't take a hit when the broad market declines. Consider the tech-heavy mid-cap growth funds on our list from


Apex and


Van Wagoner.

It looks like the Apex fund, run by Suresh Bhirud since its 1992 inception, has had problems picking winners and losers. The fund hasn't beat three-quarters of its peers in each of the last five years, according to Morningstar.

The Van Wagoner fund, however, is a high-octane fund that routinely puts more than half of its assets into technology stocks and even dabbles in private companies. Last year, that led to a 127% return for the mercurial fund. The fund's occasional short plays haven't been enough to make up for the pressure created by the fund's risky style.

"We use shorts situationally," says Peter Kris, a Van Wagoner managing director. "When we see a private company we think has a product that will really hurt a public company, we might short it. Or if we don't want to sell a struggling stock we like, we might short a competitor that's trading in the same range."

So, there you have it. Shorting might be taboo in certain circles, but for some funds, it's been a real boost.