In my three years with

TheStreet.com

, I have written many articles about products like

Rydex Managed Futures Fund

(RYMFX) - Get Report

and

Nakoma Absolute Return Fund

(NARFX)

as tools that offer protection in bear markets and a way to manage portfolio volatility. A new name for this list might be the

Dover Long Short Sector Fund

(DLSAX)

.

There are plenty of long-short and absolute return funds, but only a few have offered meaningful protection in 2008. DLSAX has been a snoozer of a fund this year, which is a good thing. It's on the way to a very small gain, compared with a 45% decline for the S&P 500.

The fund builds long and short positions consistent with the team's research of sector and global-macro themes. The sector process mainly revolves around building a case for earnings, with comparisons to the street's consensus. If the street is too conservative, the team might go long; too aggressive, then go short.

At the global-macro level, the fund gives the example of exploiting a preference for alternative energy by either going long stocks in the group or shorting companies overly reliant on fossil fuels. As of Oct. 31, the fund's longs included alternative energy, water, agriculture, staples and biotech. The shorts included REITs, tech and industrials. (It has longs in industrials too.)

The individual holdings are mostly stocks, but there are also a few ETFs like the

PowerShares Water Portfolio

(PHO) - Get Report

and the

Rydex Japanese Yen Currency Shares

(FXY) - Get Report

. I like the fact that some ETFs are used because this shows a willingness to seek out whatever tool the team thinks best ties in with its analysis. PHO may or may not be the best way to invest in water, but the managers obviously think it is.

The fund charges a 1.75% expense ratio, which is not cheap but the fund has outperformed by more than 40% this year. It would be hard to say the managers didn't earn their fee this year. One bit of warning is that, as a long-short fund, they expect to lag when the market is up a lot. This stands to reason, of course, as long-short funds strive to offer a fairly predictable return regardless of what is going on in the world.

The turnover is close to 300%. The fund has not yet declared its dividend or capital gain payout. It may make sense to hold off on buying this fund (or any traditional mutual fund, for that matter) in a taxable account until after the ex-dividend date.

Mutual fund literature always warns that past performance is not indicative of future returns, and while that may satisfy compliance requirements, what is the purchase of an actively managed mutual fund but an expression of faith that a successful manager or quantitative process will continue to be successful?

I'm not a believer in putting too much of the portfolio into any one stock or investment product because a given strategy cannot be perfect 100% of the time. Anyone interested in allocating a large portion of their portfolio to absolute return would be wise to spread it out over several funds. In addition to RYMFX and NARFX, I believe DLSAX has weathered the current stress test incredibly well and merits consideration.

Slow and Steady Wins the Race

Click here for larger image.

Source: Yahoo! Inc.

At the time of publication, RYMFX, NARFX and PHO were client holdings, although positions may change at any time.

Roger Nusbaum is a portfolio manager with Your Source Financial of Phoenix, and the author of Random Roger's Big Picture Blog. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Nusbaum appreciates your feedback;

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