When the bulls rule, it’s pretty easy to make money in the stock market. That was the case from 2003 until mid-2007. But when the bears come out of hibernation, it’s a very different ballgame.

Since stocks peaked last October global markets have plunged more than 20%. Some bourses in the emerging markets are down more than a third; Chinese stocks have crashed 53% from their best levels last fall, Indian shares are down a third and Russian stocks more than 25%.

Even the major markets, usually much less volatile than their emerging market cousins, have tanked. German stocks as measured by the DAX are down more than 25% from their highs. It’s the same story for the rest of Europe and Asia. In Latin America, equities held ground until July when commodities started falling apart. The only region to post gains in a morbid 2008 is the Gulf markets, including Dubai and Oman. But I doubt many investors have money in this part of the world or enough to make much of a difference.

In short, it’s been almost impossible to make money in this market unless you’re a skilled short seller or capable of managing a portfolio of long/short equities. In this world, that’s a rare breed of money-manager.

Over the next several years, possibly longer, global investors will probably earn a higher rate of return by employing skill based long/short equity hedge funds compared to index funds or exchange traded funds.

Index funds, all the rage over the last few years, have produced dismal returns over the last 12 months; since 1998, both the S&P 500 Index and the MSCI World Index have gained 1.5% and 3.5%, respectively. Adjusted for inflation over the same period those meager gains are actually negative. So much for passive investing.

The long/short equity hedge fund is a rare breed. Investors must be careful because the majority of hedge funds coined “long/short” don’t even short! It’s almost a crime that these hedge funds get away with charging a 20% profit fee for lagging the index.

The fact is most long/short hedge funds don’t know how to short altogether and trail the markets’ long-term return. It’s a great business for the sponsors but horrible for investors.

In the United States and offshore several superb long/short managers have successfully traded this market since the onset of subprime last August. It takes a highly skilled manager to trade a portfolio of stocks, let alone one with a short bias. These managers typically come from a short selling background and understand how to sell short. I’ll be delving more into this area in future issues of The Sovereign Individual.

Meanwhile, avoid the growing universe of long/short equity funds available to retail investors in the United States. They stink. These products have posted poor results – mostly negative returns – while levying hefty management fees. Again, these guys have no idea how to protect a portfolio of stocks.

The era of passive investing with no market hedges is over. The next several years will be rough for global investors. Learn how to embrace short selling and hedging to protect your portfolio.