In recent trading sessions, Wall Street has been reeling under recession fear. Dow fell 2.8% to post its worst week since September on Dec 9, while the S&P 500 and the tech-heavy Nasdaq lost 3.4% and 4%, respectively. Wall Street has remained volatile, with investors trying to gauge the direction that the Fed will give to the economy, and whether markets will be able to make a soft landing.

We are in the “good news is bad news” territory, with robust economic numbers making market participants nervy, with indications that the economy has not slowed down enough. The general consensus is that the Fed will only go slow in its policy tightening measures if it observes some evidence suggesting that its policies have started taking effect.

In the absence of proper evidence, the Fed might continue with its rapid pace of rate hikes, thereby risking an economic downturn. Recent economic data from various sectors have not been conclusive and investors have remained on edge. Wholesale inflation has remained on the higher side, while the labor market numbers have sent mixed signals.

However, the Consumer Price Index (CPI) for November grew at 0.1%, a much slower pace than expected for the period, and came in significantly lower than October’s 0.4% growth. This has again given the market a reason for a temporary rebound, as the Fed interprets this key inflation number.

On Dec 14, the Fed raised interest rates by 50 bps ending its streak of four consecutive 75 bps hikes, but warned that rate hikes would continue as the battle against inflation is not won. "We don't talk about this kind of recession, that kind of a recession. We just make these forecasts," Fed Chair Jerome Powell told in a press conference. "I wish there were a completely painless way to restore price stability. There isn't, and this is the best we can do."

Long story cut short, we are still in a volatile market, and major upheavals are likely to continue well into 2023. In such a scenario, investors continue to look for the best possible ways to protect their portfolio from the potential downside while still investing in growing equities. One such great strategy available in the space is long/short, which offers ways to seek profits and protection simultaneously. This strategy is primarily employed by hedge funds.

A long-short mutual fund is one that holds on to investments that it expects will outperform the market over a continued period and sells, or shorts securities, which it predicts will decline. A long-short fund seeks investments that are expected to go up, and ones expected to go down, and invests in both in an attempt to increase returns and hedge risk.

These funds employ leverage, derivatives, futures, or index options in order to maximize total returns regardless of market conditions. The hedging of the short positions comes with the long positions. Also, this strategy often comes with low fees and no lock-in period despite the need for close monitoring.

So, it will be prudent for investors to opt for long-short equity funds in the current scenario. Mutual funds, in general, reduce transaction costs and diversify portfolios without an array of commission charges that are mostly associated with stock purchases (read more: Mutual Funds: Advantages, Disadvantages, and How They Make Investors Money).

We have thus selected three long-short equity funds that boast a Zacks Mutual Fund Rank #1 (Strong Buy) or 2 (Buy), have positive three-year and five-year annualized returns, minimum initial investments within $5000, and carry a low expense ratio.

AB Cap Fund, Inc. - AB Select US Long/Short Portfolio seeks long-term growth of capital, and invests the majority of its net assets in equity securities of U.S. companies, short positions in such securities, and cash and U.S. cash equivalents. ASLKX focuses on securities of large- and mid-cap companies, but it may also take long and short positions in securities of small-cap companies.

Kurt Feuerman has been the lead manager of ASLKX since Dec 11, 2012, and three major holdings for the fund are 2.8% in Apple, 2.7% in Microsoft and 2.5% in Berkshire Hathaway.

ASLKX’s 3-year and 5-year annualized returns are 6.8% and 6.6%, respectively. Its net expense ratio is 1.59% compared to the category average of 1.92%. ASLKX has a Zacks Mutual Fund Rank #1. To see how this fund performed compared to others in its category, and other 1 and 2 Ranked Mutual Funds, please click here.

Neuberger Berman Long Short Fd (NLSAX Quick QuoteNLSAX - Free Report) seeks long-term capital appreciation and protection of investment principal. NLSAX invests in securities of, and derivative contracts on, U.S. and foreign companies. Futures, swaps, forwards or options are also used to increase returns and reduce risks.

Charles C. Kantor has been the lead manager of NLSAX since Dec 28, 2011, and three major holdings for the fund are 3.3% in Microsoft, 3.2% in Apple and 2.8% in Amazon.

NLSAX’s 3-year and 5-year annualized returns are 5.5% and 5%, respectively. Its net expense ratio is 1.64% compared to the category average of 1.92%. NLSAX has a Zacks Mutual Fund Rank #1.

Boston Partners Long/Short Research Fund (BPRRX Quick QuoteBPRRX - Free Report) seeks long-term total return by investing in long positions in undervalued stocks and short positions in overvalued stocks. The cash proceeds from short sales are invested in short-term cash instruments to produce a return on such proceeds just below the federal funds rate. BPRRX invests in equity securities issued by companies of all sizes.

Eric S. Connerly has been the lead manager of BPRRX since Sep 29, 2010, and three major holdings for the fund are 1.3% in Nexstar Media, 1.3% in Alphabet and 1.2% in Abbvie.

BPRRX’s 3-year and 5-year annualized returns are 6.5% and 3.7%, respectively. Its net expense ratio is 1.67% compared to the category average of 1.92%. BPRRX has a Zacks Mutual Fund Rank #2.

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