LONG-SHORTS THAT DODGED THE BLOWS: How three funds succeeded in a summer when most hedge-like strategies failed

At first glance, long-short mutual funds seem like a good idea. They mimic various hedge fund strategies, aiming to rise when stocks fall--or at the very least, to lose much less ground. The reality has been a little different, though. From July 1 through Sept 14, the 53 funds tracked by Morningstar fell an average of 1.4%, vs. a 0.86% decline for the Standard & Poor's 500-stock index. Even as the market has recovered a bit, some long-short funds are still getting clobbered. Among them: Geronimo Multi-Strategy Fund, down 9.75% since July 1. But even as the category has disappointed, a few funds have proven themselves. They have generally performed well in periods such as July and August, when other investments have not--a feat that has helped them shine over longer periods. Up 20.1% this year, Caldwell & Orkin Market Opportunity (COAGX) was one of the few long-short funds to turn a profit both in February, when subprime concerns first arose, and during the market slides in July and August. Like Caldwell & Orkin, the Diamond Hill Long-Short (DIAMX) challenges conventional wisdom. That was the case with energy stocks, a sector that's favored now but wasn't when co-manager Ric Dillon started buying four years ago. Thanks to the fund's out-of-sync bets, it has earned an average annual 10.13% since its launch on June 30, 2000, vs 1.98% for the S&P. The $4 billion Gateway Fund (GATEX) is up a market-beating 6.69% so far this year and 6.66% over the past 10 years. But stock-picking hasn't played a big role. Gateway buys a broad basket of stocks that roughly resemble the S&P 500 with a dividend yield of 2.6%, vs 1.9% for the index. The fund generates additional income by selling call options on the portfolio.