For investors, the newfangled funds offer guaranteed performance with different strategies that protect investors from market swoons better than traditional mutual funds. They also offer lower fees than pure hedge funds, as well as greater transparency and liquidity, which further guarantee money-making opportunities. They offer a higher level of oversight, charge lower fees, and face more scrutiny from watchdogs than most hedge funds. Investors can also withdraw and add money on a daily basis.

These "hedge-like" mutual funds have done well in attracting assets over the past two years. The 35 hedge-like mutual funds that Morningstar tracks manage a collective $12.7 billion, as of Sept. 30, while two years ago they managed $4.6 billion. More mutual funds are expected to head in the direction of hedge fund-like mutual funds, experts say. "There has been a tremendous pick-up in interest," said Vivienne Hsu manager of the Charles Schwab Hedged Equity Fund. Last year, hedge-like mutual funds rose to a bit more that 5%, which is lower than the 11% increase for the S&P 500 and the 9.6% increase for the average hedge fund.

But combined with the fact that the stock market's flat performance this year makes it tough for mutual funds to effectively employ hedge fund strategies, like shorting, it's led others to a more pessimistic view of the products and they're cautioning against flooding the market with them incoming years. "Don't tell me about the value of shorting stocks after experiencing the three best to short stocks in 60 years, tell me why it makes sense for the next five years," said James S. Riepe, the vice chairman of T. Rowe Price Group. "Today we have an environment in which the options to achieve attractive returns - at least in the short-term - seem more limited than usual."