NEW YORK (CNNMoney.com) -- With both the stock and bond markets delivering disappointing returns this year, what can ordinary investors do to hedge against these declines?

Hedge funds - private investment partnerships limited to wealthy individuals or institutional investors - have carte blanche when it comes to how they invest compared to most mutual funds. That means managers can use a variety of strategies that are off-limits to mutual fund managers to generate returns.

Several mutual fund firms are launching hedge-like funds for retail investors.

But a handful of mutual funds from Geronimo Financial and Mellon Capital Management are using hedging techniques, such as selling stocks short or using options, to protect investors during market declines. Short selling involves betting that a company's stock price will fall.

Many of these funds have minimums as low as $1,000, and most do not have minimum income requirements that investors must meet.

In a year when the S&P 500 Index is up only 1.97 percent for the year and down 1.7 percent for the quarter, and the Lehman U.S. Aggregate bond index is down 1.05 percent for the year, these funds may be attractive to some investors.

But Jeff Tjornehoj, senior research analyst at mutual fund tracker Lipper, recommends that investors use these funds in the same way that investment pros at big institutions use hedge funds: as a small part of a balanced portfolio.

"There is no harm in putting together a solid portfolio but then allocating 5 to 10 percent in a strategy like this just to see what happens," said Tjornehoj. "I could see something like this being used as an allocation that may not correlate strongly to the rest of their portfolio, much in the same way you might use a commodity fund or real estate."

Tjornehoj said these funds can be a good diversification tool, but he recommends that investors looking to add hedging strategies to their portfolio proceed slowly and look at several factors before deciding to invest.

For starters, how much does it cost? Hedge-like mutual funds sometimes charge hefty fees. Tjornehoj recommends sticking with funds that don't charge an expense ratio of higher than 1.3 percent.

Also, investors should have a firm grasp on why they want to add such a fund to their portfolios, and what function it should serve. If an investor wants a hedge-like fund to help juice up returns, he or she should choose a more aggressive style - but also understand that these funds may under-perform during up markets, says Tjornehoj.

If an investor wants a fund to help reduce the risk of a portfolio that's heavily tied to the stock market and mostly long, then it's equally important to understand that a truly hedged portfolio - e.g., one that holds the same number of long and short positions - means investors will not capture the same gains when the stock market is up.

Tjornehoj said Lipper currently tracks three main types of mutual funds that employ hedging techniques: market neutral, long/short equity and dedicated short bias.

Market-neutral funds are generally classified as the least risky of the three, according to Tjornehoj, and are up about 3.22 percent this year, according to Lipper.

Long-short funds tend to have a higher risk profile. These funds hold both long and short positions. And while they tend to have more long positions than short, they can change the amount they are net long or short depending on how the market is moving. Long/short mutual funds are up about 4.6 percent for the year to date, according to Lipper.

Finally, dedicated short bias funds are funds that are positioned short nearly 100 percent of the time. Tjornehoj said this is the most risky of the strategies, if only because stocks tend to go up over the long run. The short-bias funds that Lipper tracks are up about 1.41 percent for the year.

"That said, there are certainly periods where going short is extremely beneficial," said Tjornehoj. "This year these funds are kind of in the middle of the pack, but for the second quarter they're one of the best performers - up about 6 percent."

He advised that these funds must be used appropriately, "and with great consideration for surprise by the market."

A slew of new funds designed to protect retail investors against stock market declines have debuted this year.

These include two new funds from Geronimo Financial, a Denver-based firm with $400 million in assets that bills itself as the first alternative-investment firm geared solely toward retail investors.

Earlier this year, Geronimo launched funds including the Geronimo Sector Opportunity Fund, a long-short equity fund, which is up 3.38 percent year to date through May, and the Geronimo Option and Income Fund, a market neutral fund that is up 4.82 percent through May.

David Prokupek, chief executive and chief investment officer of Geronimo, said that mutual fund managers have to follow stricter parameters than hedge fund managers for shorting, to comply with laws governing mutual funds.

For example, a mutual fund cannot use short positions or derivatives without having enough assets in liquid securities to cover that position. These funds are also restricted in the amount of leverage - or borrowing to enhance returns - that they can use, and they cannot trade illiquid securities, Prokupek said.

He views his firm's products not as a means to generate shoot-the-lights-out returns, but rather to minimize risk in an investor's portfolio.

"The role of alternatives is to make the downside less painful," he said.

Mellon Capital Management, a division of Mellon Financial, has also launched two new funds aimed at taking hedging tactics to the retail market: the Global Alpha fund and the Dreyfus Premiere Total Return fund.

Charles Jacklin, president and CEO of Mellon Capital Management, said those funds will be run parallel to similar funds the firm offers to institutional investors, but will make minor adjustments to make sure the funds are in keeping with laws governing mutual funds.

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