Is the market hot enough for you? It’s hot enough for some people that they’re thinking about what would happen if everything melted.

The S&P kissed the 2,000 mark in late August, a rise of almost 200% from March 2009. That’s raised fears of overvaluation, overheating and overstimulated investors. The Shiller PE ratio was hovering above 26 as of September 10, a yawning gap over its average of 16.55. There’s fear the major indexes are due for a correction at least or—if the slow GDP growth and sluggish employment are indicators of broad economic malaise—something worse.

Not surprisingly, defensive alternative investments are on people’s minds, including long-short mutual funds, with stock-shorting capabilities designed to provide an umbrella against the ineluctable bad weather.

For its boasted money fortifications, the long-short mutual fund category has seen a freshet of money come spilling into it. In 2013, says Lipper, the net inflows ballooned more than five and half times to $19.719 billion, from $3.468 billion in 2012. As of September 4, the net inflow for 2014 was $7.767 billion. Nineteen new long-short funds had hit the market in 2014 by late July, Lipper says.

A lot of that is likely fueled by investors preparing to cover themselves.

“There’s probably a feeling the bull market is starting to get a little long in the tooth,” says Jerry Verseput, an advisor with Veripax Financial Management in Folsom, Calif. “In the last big downturn, long-short funds did pretty well relative to the rest of the market because they had that short contingent that softened their drawdown.”

That sentiment is echoed by Morningstar, whose long-short category lost only 14% in 2008 while the S&P 500 lost 38%.

“The market crisis made me re-evaluate my entire strategy,” says Verseput. “And it made me add a significant number of other asset classes. So I look at long-short funds as being a different asset class. The lesson that I learned coming out of 2008 is that to have a diversified portfolio, you’ve got to have investments that do different things. So if you have a portfolio that’s full of long-only funds, all of them are just buying stocks … they are all doing the same thing. And they are all going to go down at the same time.”

Long-short funds, of course, have the power not only to bet for stocks, but bet against them. But the subject quickly becomes tricky, say sophisticated long-short fans, because shorting involves considerable risks. It’s not as simple as buying companies you like and betting against those you don’t, says Cleo Chang, the CIO of Wilshire Funds Management in Santa Monica, which looks for long-short funds to invest for clients like broker-dealers, insurance companies and RIAs.

She says novel vehicles like 130/30 funds, (so named because they hold 30% short and use proceeds from the short sales to buy 130% long), were problematic because they did not corral risk so much as amplify stock sentiments. They were a hot item circa 2008, but they were mauled by the bear market. Companies such as Fidelity, Munder, ING and Legg Mason either wiped them off the books or merged them into other funds.

“One of the things that was learned by retail investors and institutional investors for that matter in the 130/30 era,” says Chang, “was that just because a manager knows how to [go] long a stock and they rank their stock universe from best to worst, that doesn’t necessarily [mean] they know how to run a long-short portfolio.

“What was overlooked and underappreciated is that if you have a short position that’s not a covered short, your potential loss on that position is unlimited. Shorting a certain stock relative to an index is not the same as not holding that stock.”

If a manager doesn’t have the expertise, Chang says, he or she won’t properly quantify the risk exposure, and if things go wrong, won’t know how to react. A manager might have trouble getting out of the positions when liquidity dries up, for instance, since funds depend on borrowing from custodians. “You want to know how much of that particular stock is being shorted because there could be a squeeze on supply.”

“One must be careful as one never knows if the fund manager will make a mistake and fail to purchase a suitable amount of put options to offset risk, etc.,” adds Don Martin, an advisor with Mayflower Capital in Los Altos, Calif. “Or they could have puts that don’t properly track the risks of the long side of the portfolio.”

As Chang says, it’s not just about stock picking. It’s about knowing the risk and having an infrastructure at the fund that can support it.

Fear of long-short funds might be compounded by the fact that we’ve been in a bull market for five years, and many managers might have been tempted to simply go long like any other fund.

Martin got into the popular MainStay Marketfield Fund two years ago, but got out this past summer because he felt it was too long in its holdings and was too exposed to the market as a whole. He also distrusts the short track records of many long-short vehicles, as so many new ones have rushed to market in the past few years to take advantage of the low volatility trend. They aren’t hedging as seriously as they could, he says.

“These long-short funds tend to not be really 50/50 long or short. Many times really only a third of their assets are short. … and I felt there was too much evidence the market was going up in a bubble for stocks and I felt [Marketfield was] too long and their attitude was too bullish. It wasn’t really a long-short fund.”

Josh Charney, an alternatives investment analyst at Morningstar in Chicago, says the correlation between these funds and the market is currently relatively high, despite the great defensive play they were in 2008. “That correlation for the last couple of years, the average for all long-short funds, is 0.77.” However, he says, that’s reasonable for these strategies. “They are going to be more correlated than other alternative funds because they are so equity-based. … The market has been doing really well. There’s not a whole lot of need for downside protection at this juncture. So they are opening up their sails so to speak, kind of letting it ride.” At a beta of 0.5 or 0.6, he says (1.0 being in lockstep with the market) “they’ll move at about half the rate of the market.”

But going forward, you don’t want these funds performing in lockstep, and there is a market timing risk. The Marketfield fund, with almost $20 billion in assets, has ballooned from a shallow $2 billion since it was acquired by New York Life’s MainStay stable. Despite the huge inflow, the fund famously made bad bets early in 2014 that caused it to stumble (putting faith in names like Bank of Ireland and shorting consumer products companies like Coke, Kellogg and Nestle and emerging markets indexes that have rallied). But it’s still one of Verseput’s largest holdings, since he says the growth has been steady and the fund did indeed do what it was supposed to do in 2008: staunched the blood loss.

“Marketfield will rarely, if ever, commit enough to its short holdings that it will achieve positive returns when the entire market heads south; however, it was enough to limit them to about a 13% loss in 2008,” he says.

Making choices among funds can be hard simply because the performance is all over the place. Some Morningstar category choices have 17% returns over the past five years, while others can be in the single digits or negative.

Dan Roe, the chief investment officer of Budros, Ruhlin & Roe in Columbus, Ohio, says altogether the risk parameters among long-short funds are so different that they can hardly be considered one strategy. Because the managers have so much discretion over what’s long and what’s short, it can cause a huge disparity in returns.

“For instance, I could be very satisfied with one [long-short] manager that achieves a 5% return but disappointed with another that returns 8% if they are assuming very different amounts of market exposure or risk,” Roe says. “Net market exposure explains so much about performance but is not always the topic of conversation when performance is being reviewed.”

“Let beta guide the way,” says Charney. “Generally, you can gauge some of that disparity a little bit just by looking at the fund’s overall beta. So if the beta is low, like in the 0.4 range, you should definitely expect it over the last couple of years to underperform a fund that has a beta of 0.6 or 0.7.

The Wasatch Long/Short Investor fund, for example, is a $2.8 billion long-short equity fund that has done phenomenally just because its short exposure is down to about 12%, he says, so the long side is bigger. But it’s important to ask, what is the beta on a fund and is the beta going to remain constant over the next couple of years?

“Some funds like [Robeco Boston Partners L/S Equity] generally keeps the beta at 0.4-0.5—so, very consistent,” says Charney, “where some funds like Wasatch will move it around pretty substantially from one side of the extreme to the other. So that’s something to keep an eye out on.”

James Bishop, director of national and institutional sales at Diamond Hill Capital Management in Columbus, Ohio, says the firm’s Diamond Hill Long-Short fund, which has been around 14 years and shorting for about 12, uses a fundamental strategy that looks at companies’ intrinsic value and the premium it’s trading at, then takes long or short bets accordingly. It’s up 52% for the five years ending September 8, 2014, but it lost 24% in 2008.

“We don’t do any macro,” he says, “Whereas a lot of the other firms have some kind of macro view and apply that to their investment thesis, we do not. We’re just shorting based on the individual companies.”

CFP Diane Pearson, another long-short fan from Legend Financial Advisors in Pittsburgh, says these funds have been harmed by their sensitivity to low interest rates, since they hold cash in money markets for the shorting positions.

Another thing that critics don’t like is the funds’ higher expenses, which might not be so much about manager greed as the structure of the products, which require more trading and even money held for dividend payouts on the shorts.

In long-short funds, “there’s going to be more trading, obviously, just because there’s a significant amount of positions in the portfolio, more holdings, more costs, more research in general,” says Charney.

“Advisors who aren’t familiar with these funds can sometimes get hung up on the expenses,” says Verseput. “The expenses include the potential that the fund may need to pay a dividend on stocks that are held short through an ex-dividend date. Although this is an easily-avoided expense and does not go to the fund managers, the prospectus needs to account for the possibility of incurring this expense. Advisors often assume the managers are getting paid too much.”

Pearson says Legend Financial has been using long-short funds for almost 20 years, specifically the Caldwell & Orkin Market Opportunity fund, which has shorting capabilities. The fund lost only 4.66% in 2008 while the S&P sank 38%. “We have always used this hedging type strategy in what we call our lower volatility portfolio,” she says. “Long-short funds have fit this strategy very well over the years and in particular in 2008. Probably even better in 2000 and 2001. Because many of our portfolios actually made money during that downturn.” But she wishes the shorting positions had worked better afterward. In 2009, the Caldwell fund was down 5% when the S&P rose 26%, and in 2010 it was down 1.01% when the S&P was up 15%.

“It hasn’t necessarily done what we would like for it to have done since 2008 … understanding that for the shorting strategy they still have to have exposure to the money markets. Just for the asset class as a whole, not necessarily for [Caldwell & Orkin], they could have done a little bit better and had a little bit more exposure to the equity market in this environment. But that’s trying to tell somebody they should know exactly what’s going on in the market at all times.”

Martin is a real bear. He’s totally out of stocks. He’s started looking to long-short bond mutual funds.

“I’m in a bond strategy,” he says. “I don’t want my clients to suffer from bond funds that only pay 1.5% and I don’t like to see people get stuck with a 30-year duration to get a bigger coupon. So one compromise is these long-short bond funds, so sometimes they are able to pull off 3% and 4% yields and keep the duration very low and keep their credit quality at reasonable levels like ‘BB,’  you know one notch below investment grade. So the amount of below-investment-grade bonds might be only one-third of the portfolio. So they have a good mixture of credit quality, low duration and high yield and somewhat low risk. But there is no guarantee they won’t make a mistake.”