Mutual Funds That Protect Against Erratic Markets

Because of the broad diversification, the absolute return fund tends to avoid big losses.

"For protection against the volatility in the stock markets, we have been emphasizing the lowest-volatility strategies that we have," says Boyda.

Another multialternative fund that ranges widely is Virtus Alternatives Diversifier. During the past three years, the fund has returned 9.2% annually, outdoing 93% of peers.

Virtus invests in eight sectors, including commodities, currencies, and global infrastructure. For each sector, the portfolio managers have a neutral target allocation.

The managers overweight sectors when they appear more promising. The fund currently has 17.6% of assets in commodities, compared to the neutral allocation of 15%.

In its neutral allocation, the fund has 10% in Virtus Senior Floating Rate(PSFIX) , which invests in loans made to companies with below-investment grade credit.

Although most multialternative funds do not hold floating-rate securities, the Virtus managers argue that the instruments belong in the portfolio because of their unusual characteristics.

When interest rates rise, yields on the floating instruments also climb. That enables the instruments to stay in the black when most other bonds are sinking.

"Floating-rate securities have very low correlations to traditional fixed-income investments," says Peter Batchelar, vice president for product management of Virtus.

A fund that excelled in the downturn of 2008 is Dreyfus Global Absolute Return. Dreyfus takes long and short positions in stocks, bonds, and currencies.

The fund is currently short on bonds. Portfolio manager Vassilis Dagioglu worries that interest rates are skimpy.

"The current interest rates do not provide enough compensation for the future risk of inflation," he says.

Dreyfus uses futures and other derivatives for exposure to different stock markets.

The fund currently has long positions on markets in Germany and Netherlands. The managers figure that panicked investors have driven down European stocks to bargain levels.