When the market dives, that’s when hedge funds—well, those true to their name—are supposed to earn their money. That’s because many hedge funds are designed to avoid big losses and make money nearly every year using low-correlating absolute-return strategies. Lately mutual funds have appeared that are designed to act like hedge funds, selling short or using other techniques to produce steady results in many market climates.

In February 2006, we recommended six of this new breed of mutual fund. How did they perform when the market sank on Feb. 27? Not bad. All but one broke even or lost less than the S&P 500 did. Of course, one market gyration does not scientifically prove the point. And don’t forget, as you see below, they don’t capture all of the upside in a full-on party market.

Fund Ticker 2/27 Return 1-Year Return Beta
Analytic Global Long/Short ANGLX -2.1% 9.3% 0.55
Arbitrage ARBFX -0.3 5.2 0.52
Diamond Hill Focus Long/Short A DIAMX -1.09 11.7 0.42
Icon Long Short I IOLIX -3.66 3.3 1.52
Laudus Rosenberg Value Long/Short BRMIX 0.0 -0.2 0.01
Schwab Hedged Equity SWHIX -1.86 9.6 0.57
Vanguard 500 Index VFINX -3.46 14.3 1.00
Source: Morningstar. One-year returns through 1/31/07.