This alternate strategy involves buying the stocks of attractive companies and selling short those deemed overvalued. Investors gain from a rising stock market – although probably by less than if they had no short positions – while short positions cushion their portfolios in down markets. Typical ways to participate are through hedge funds or long-short mutual funds, such as the Diamond Hill Long-Short Fund, says Tony Daniel, senior vice president at LCG Associates, an Atlanta-based consultant to institutional investors.
"For investors feeling a little shell-shocked from 2008," a long-short strategy "is an attractive way to invest in stocks but with reduced volatility," he says.
