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Wall Street is bracing for the worst year in over a decade due to heightened fears that the economy will plunge into a recession. With the Fed inferring that inflation is still at alarming levels and wanting to bring it down to its target rate of 2%, as was recently made clear by Fed Chair Jerome Powell at the Jackson Hole symposium, further tightening of the monetary policy lies ahead. There is an overwhelming opinion that the Fed, in their September meeting, would hike interest rates between 50 bps and 75 bps.

Russia’s invasion of Ukraine and its impact on the global economy has also been weighing on investor sentiment. Tech and other growth stocks have been bearing most of the brunt, while energy has been the most steadfast sector throughout the year due to supply disruptions and unprecedented demand. The geopolitical tensions between Russia and Ukraine and in the Middle East continue to keep markets volatile.

In volatile markets, long-short funds are usually considered good options for risk-averse investors. This strategy is primarily employed by hedge funds. A long-short mutual fund is one that holds investments it expects to outperform the market over a long period and sells, or shorts securities, which it predicts will decline. The aim of a long-short fund is to find investments that are expected to go up, and ones expected to go down, and invest in both in an attempt to increase returns and hedge risk.

These funds utilize 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 fact that these need diligent 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 Select US Long/Short Portfolio ASILX seeks long-term growth of capital, and invests at least 80% of its net assets in equity securities of U.S. companies, short positions in such securities, and cash and U.S. cash equivalents. ASILX focuses on securities of large- and mid-cap companies, but it may also take long and short positions in securities of small-capitalization companies.