For decades the prevailing wisdom held that investors should allocate 60 percent of their portfolio to stocks and 40 percent to bonds to achieve both capital appreciation and stability. That advice was so common that it became a mantra for investors of all stripes.

But the Great Recession of 2008-09 changed the equation, as stocks and bonds fell sharply in lockstep and a 60-40 portfolio diversification proved of little benefit to investors. The past months of market volatility have reinforced the message that investors should look beyond stocks and bonds when constructing their portfolio. 

Investment advisors are increasingly allocating a greater share of assets to alternative funds; it’s now recommended that 5 to 10 percent of a portfolio’s assets be devoted to strategies that show little correlation to stocks and bonds. These asset inflows have led fund houses to issue products to meet this growing demand. The number of funds that employ alternative strategies now tops 300, compared to just a few dozen a decade ago.

To help our readers select the best alternative investments, we screened more than 300 alternative-strategy funds. Our research uncovered two standout offerings.

Although we generally don’t profile mutual funds that have been in operation for less than three years, Collar (COLLX, 888-526-5527) is a unique offering that warrants an exception to that rule.

The fund establishes a long position in a stock and then “collars” that position by writing a call option and buying a put option on the position. The aim of this strategy is to create upside potential that’s at least 1.5 times superior to the position’s potential downside. Investors who buy the call option can purchase the stock at a fixed price at a fixed point in time. A put option is the opposite of a call, and allows the option owner to sell shares at a specified price at a specified time.

The collar strategy put a floor under any losses and a ceiling on any gains, reducing the fund’s overall volatility. As a result, Collar doesn’t produce spectacular returns. But the fund rarely suffers significant losses and generates returns that generally outpace bonds but underperform stocks. This allows the fund to maintain a risk profile that’s similar to bonds. For example, in the second quarter of 2010, the S&P 500 lost 11.4 percent compared to a 3.4 percent decline for Collar. Conversely, Collar returned 3.1 percent in the third quarter of 2009, while the S&P 500 gained 15.6 percent.

Information technology, energy and materials are among the fund’s largest sector allocations. But Collar’s management doesn’t necessarily make sector bets. Instead, the fund seeks the most favorable risk-reward ratios found in the options market, which means that the greatest percentage of assets are devoted to sectors in which options investors are bullish.

The fund isn’t without risk, but it will help dampen a portfolio’s overall volatility. Collar charges an annual expense ratio of 0.94 percent–which is low for the category–and doesn’t charge a sales load.

Marketfield (MFLDX, 888-236-4298) employs a more traditional hedge fund strategy than Collar. In fact, Marketfield’s strategy is the closest replication of a traditional hedge fund that’s found in a mutual fund wrapper. What’s more, the fund doesn’t charge the “2 and 20” fee—2 percent of assets under management and 20 percent of gains—that’s typical in the hedge fund industry.

Manager Michael Aronstein takes a broad macroeconomic view of the global marketplace. Although the fund’s mandate allows him to use derivatives, the fund achieves its investment goals primarily through a combination of long and short equity positions in individual stocks or exchange-traded funds that track broad indexes.

According to the fund’s most recent disclosure, a long position in iShares Barclays 20+ Year Treasury Bond (NYSE: TNT) and a short position in iShares MSCI Emerging Markets Index (NYSE: EEM) comprise the fund’s largest positions. These positions reflect management’s view that non-US equities are experiencing a bear market, Aronstein said in a recent statement to shareholders. Consequently, Aronstein has sought safe haven in Treasury bonds and cash, which account for just more than a quarter of the fund’s investable assets. 

That conservatism has paid off this year. The fund has lost slightly less than 6 percent year to date compared to an almost 8 percent decline for the S&P 500.

The fund isn’t immune to downturns in the market. But Marketfield has exhibited much less volatility than the broader market over the trailing three-year period. The fund’s beta comes in at 0.65 compared to the S&P 500 and 0.36 compared to Morningstar’s Long-Short Equity category. Over the same period its standard deviation clocks in at 15.4 compared to 21.2 for the S&P 500. This means that the fund’s swings in performance won’t be as dramatic as the stomach-dropping gyrations of the broad market.

Marketfield has outperformed the market for most of its history. The fund lost just 12.9 percent in 2008 compared to a 37 percent decline for the S&P 500. The next year, Marketfield gained 31.1 percent compared to a 26.5 percent return for the index. The fund’s 14.3 percent gain in 2010 slightly lagged the benchmark index.

Our recommendation comes with one major caveat. Marketfield’s success largely depends on Aronstein’s ability to sense the macroeconomic winds and time the fund’s investments appropriately. Thus far, Aronstein’s bets have paid off, but the fund is likely to stumble occasionally. The fund’s expenses are also fairly high at 2.46 percent, though these fees are arguably justified by the fund’s complex strategy. 

Although Marketfield will likely exhibit more volatility than Collar, it’s another solid option for investors who want beef up their portfolio’s exposure to alternative strategies.

But investors must be clearheaded before they establish positions in either fund. Although these funds’ strategies are designed to limit losses, they will almost certainly lose value at some juncture. These funds—as is the case with any investment—provide no guarantees of eternal gains. However, a small allocation to either of these offerings will dampen a portfolio’s overall volatility over time.