Hedge your portfolio without taking on the risks and costs of hedge funds. By Bob Frick, Senior Editor September 1, 2011 Buying a fund that employs hedge-fund strategies is the simplest way to bring hedging to your portfolio in a diversified way. You could buy the top-performing example, Direxion Spectrum Select Alternative (symbol SFHYX), which lost only 12.2% in 2008 (compared with a 37.0% loss for Standard & Poor’s 500-stock index) and has a five-year annualized return of 7.0%. (All returns are through August 8.) But its annual expenses, at almost 5%, are scary. IQ Alpha Hedge Strategy (IQHOX) has lower expenses of 2.21% but a less impressive record. Since its inception in June 2008, it has returned 1.5% annualized, though its record looks better when you consider that it started just before the 2008 crash but lost only 8.0% that year. SEE ALSO: Our Special Report on High-Net-Worth Investors Merger Fund (MERFX) invests in select takeover subjects after an acquisition or merger has been announced. If the merger actually goes through, the stock price continues to increase, and Merger captures that rise—a strategy that can reduce volatility because it isn’t linked to movements of the general market. A member of our Kiplinger 25 list of favorite funds, Merger Fund barely dipped during the calamitous 2008 fall. It has returned an annualized 2.4% over the past five years. Merk Hard Currency (MERKX) is a bet against the U.S. dollar. Manager Axel Merk invests in a basket of hard currencies from countries that he believes have sound monetary policies and whose currencies he believes will rise versus the dollar. His fund can also own gold, which is currently one of its top holdings at 8% of assets. The fund’s five-year annualized return is 7.1%. It’s less volatile than the S&P 500 and isn’t linked to the S&P’s performance. Advertisement Wasatch Long/Short (FMLSX) resembles a classic hedge fund: It buys stocks of firms that it likes and sells short stocks that it expects to fall. Co-manager Michael Shinnick shorted real estate trusts before the housing bubble burst, which held the fund’s 2008 losses to 20.9%. Its five-year annualized return is 3.1%. Although long-short funds offer some downside protection, they tend to roughly track market ups and downs.