The verdict is in. Investors are throwing in the towel on long-term buy-and-hold investing strategies. After living though a decade containing two bear markets and a financial crisis, many folks aren't much further ahead than they were 10 years ago. Just ask the S&P 500, which is currently trading roughly where it was in February 1999. Feeling let down by the promise of long-term investing strategies, investors are looking for new ways to protect their capital and make money in an uncertain market.

Alternative lifestyles
According to Morningstar data, investors got back into the game in June, adding money to mutual funds despite rising concerns over economic weakness and the possibility of a double-dip recession. But the money didn't go into stocks. Perhaps not surprisingly, equity funds continue to hemorrhage money, losing $7.5 billion in June alone and nearly $17 billion so far in 2010. In contrast, bond funds are still raking in money, with $17.6 billion finding its way into taxable bond funds in June, marking total inflows of almost $120 billion for the year.

But investors not content to stick with status quo investments are also pouring money into "alternative" mutual funds such as long-short and bear-market funds and ETFs. Morningstar data shows that these funds took in more than $38 billion last year and have gathered $15 billion in assets in the first half of this year. In light of recent results and the current environment, it makes sense that folks are seeking shelter in alternative investments, but the move could end up hurting more than helping.

Theory vs. practice
On first glance, long-short funds seem like the ideal investment. After all, not only do managers get to invest in the stocks they think will outperform, but they can also short the names that they consider overvalued. But in practice, these funds tend to do well only in negative markets, thanks to their shorting component. That design has given the funds an edge in recent history, thanks to the 2000-2002 and 2008 bear markets. But when the market is up, these funds tend to underperform the broad market. Add to that the fact that the average long-short fund comes with a 2% annual price tag according to Morningstar data, and investors could end up paying through the nose for dubious results.

Likewise, bear-market mutual funds are typically expensive, carrying an average annual expense ratio of 2%. Even in the ETF world, the ProShares Short S&P 500 (NYSE: SH) runs with a 0.95% expense ratio, while the ProShares UltraShort S&P 500 (NYSE: SDS) comes with a 0.91% annual charge. Compare that to a price of just 0.09% for the more diversified, broad market SPDR S&P 500 ETF, and you'll understand the cost problem.

Moreover, the addition of double- and triple-leveraged bear market funds adds to the potential risks investors can undertake in betting on the short-term direction of the market. Considering the average bear market fund has trailed the S&P 500 even over the past decade -- during which the S&P lost money -- it's hard to say that these funds are good long-term investments.

Of course, there are some alternative funds that have done well against the market, including Hussman Strategic Growth (HSGFX), currently classified as a long-short fund by Morningstar. Manager John Hussman has been in the news quite a bit, touting his negative views on the U.S. economy. Despite his dire macroeconomics predictions, Hussman is finding value in the health care sector, investing in Life Technologies (Nasdaq: LIFE), Humana (NYSE: HUM), and AstraZeneca (NYSE: AZN). Hussman believes these firms meet his criteria for strong revenue growth, low debt levels, and favorable valuations based on future expected cash flows. In addition, Hussman continues to avoid sectors that rely on credit expansion, making select health care names attractive. Overall, the fund has meaningfully outperformed the market over its lifetime and features a very reasonable 1.02% price tag. But solid funds like these are a rare find in the alternative fund space.

Use with caution
While alternative funds can serve a legitimate role in anyone's portfolio, unfortunately too many investors are flocking to these funds at exactly the wrong time and using them as a tool to make up lost ground. As a group, investors are notorious for moving into and out of sectors of the market at the most inopportune moments. That means that if the mass money is heading into bear-market funds, you can be reasonably sure that better days are ahead for the market! Similarly, too many folks are simply making a short-term bet on a market decline and using funds like these to make a quick profit. History has shown us nothing, if not that the vast majority of folks are horrible market timers.

Investors can use alternative or bear-market funds wisely as a hedge against further market declines. However, these funds should be kept to a small portion of your portfolio if they are utilized. Don't count on them to make up money you've lost in the past few years. Most of these funds simply aren't designed to do that. You'll likely be hearing much more about alternative funds, but as with any investing trend, make sure you carefully evaluate your long-term portfolio needs and objectives before following the crowd.