Pimco, TIAA-CREF Top Hybrid Funds

Hybrid funds, in the news because of the Madoff scandal, gave investors handsome returns last month.
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The taint from Bernard Madoff's alleged Ponzi scheme has made investors think twice about choosing fund of funds or other hybrid fund objectives whose investment strategy is murky.

In light of the recent events, let's review the best-performing hybrid open-end mutual funds in December that go beyond usual fund categories and appear to have largely sidestepped the Madoff scandal.

These mutual funds, largely holding a mix of stocks and bonds, are considered alternative or hybrid strategies. The hybrid category also includes funds with target asset allocations, balanced portfolios, derivative strategies and flexible portfolios.

The best-performing hybrid fund we tracked in December,

PIMCO RealEstateRealReturn Strategy Fund

(PRRSX) - Get Report

, jumped 25.9% during the month. The fund balances the risk of real estate derivatives, such as REIT total return swap agreements, with a portfolio of inflation-protected government securities and other fixed-income instruments.

The theory behind this investment strategy is that, for a fraction of the cost of owning all the securities in the benchmark Dow Jones Wilshire Real Estate Investment Trust Index, index derivatives like options, futures and structured notes can be purchased to achieve a similar real estate sector exposure.

The second best hybrid fund for the month was the

TIAA-CREF Institutional Real Estate Securities Fund

(TIREX) - Get Report

, up 17%. The fund allocates a minimum of 80% of assets in the stocks and debt of real estate companies. However, currently, the only fixed-income securities in its portfolio are a small amount of U.S. Treasuries.

A total of 96% of the fund is made up of individual equity holdings, including

Simon Property Group

(SPG) - Get Report

, shares of which were up 11.9% in December;

Vornado Realty Trust

(VNO) - Get Report

, up 12.9%;

Public Storage

(PSA) - Get Report

, up 15.8%; and

HCP

(HCP) - Get Report

, up 34.4%.

Returns of 25.9% and 17% are quite nice in comparison to the

Dow Jones Industrial Average

, as measured by the

Diamonds Trust

(DIA) - Get Report

, slipping 0.57%, while the

S&P 500 Index's

SPDR Trust

(SPY) - Get Report

inched up 0.98% and the Nasdaq-100 index's

PowerShares QQQ

(QQQQ)

rose 2.28%.

If you are looking for a different way to add the diversification of international stocks of the MSCI-EAFE Net Dividend Index to your portfolio mix, consider Bill Gross'

Pimco International StockPLUS Total Return Strategy (Unhedged)

(PPUAX) - Get Report

, which gained 16% in December.

The fund's "enhanced-index strategy" holds MSCI-EAFE Index-linked derivatives against an actively managed "total return" bond portfolio with low to intermediate duration as collateral. Unlike the

PIMCO International StocksPlus Total Return Strategy US Dollar Hedged Fund

(PISIX) - Get Report

, which by rising 10.9% also made the top 10 list, the "unhedged" fund is fully subject to the volatile fluctuations of the U.S. dollar against foreign currencies.

For the second month in a row, we have seen a massive flight to quality and the safety of U.S. government debt. The yield on 10-year U.S. Treasury notes plummeted 24.11% to 2.244%, as measured by the Chicago Board Options Exchange 10-Year T-Note Index. Bond prices shot skyward, carrying the

Direxion 10 Year Note Bull 2.5X Fund

(DXKLX) - Get Report

, up by 12.4% for the month. This fund uses futures contracts to mirror daily returns approximating 250% of the benchmark 10-year Treasury note and is the only fund listed to have had a positive year in 2008, surging 45.61%.

Lastly, the

RiverNorth Core Opportunity Fund

(RNCOX) - Get Report

, ninth on the list at 10.92% for December, is a classic fund of funds. It holds about 75 closed-end and exchange traded funds, including

Tri-Continental

(TY) - Get Report

,

Van Kampen Dynamic Credit Opportunity Fund

(VTA) - Get Report

and

iShares MSCI Emerging Markets

(EEM) - Get Report

.

While none of the above funds has disclosed any exposure to Bernard Madoff, the fund of funds structure does have the inherent oversight risk whereby the lead fund cannot be absolutely sure where the underlying funds are currently investing their assets at any particular time. Beyond that risk, the fund-of-funds structure does suffer from an additional layering of fees that can eat into returns over time.

Source: TheStreet.com Ratings. For more information, check out an

explanation of our ratings

.

Kevin Baker became the senior financial analyst for TSC Ratings upon the August 2006 acquisition of Weiss Ratings by TheStreet.com, covering mutual funds. He joined the Weiss Group in 1997 as a banking and brokerage analyst. In 1999, he created the Weiss Group's first ratings to gauge the level of risk in U.S. equities. Baker received a B.S. degree in management from Rensselaer Polytechnic Institute and an M.B.A. with a finance specialization from Nova Southeastern University.