Mutual funds’ investment strategies can vary widely, with some focusing on aggressive growth, while others have a less risky style that would appeal to fixed-income investors.

Then there are funds like Swan Global Investment’s Defined Risk Fund (SDRAX), which take a hybrid approach.

The fund, which launched in 2012, invests primarily in exchange-traded funds, or ETFs, but also plays the options market with the goal of hedging against big market slumps.

The fund is up about 3 percent this year, according to FactSet.

Randy Swan, lead portfolio manager of the fund, explains the fund’s strategy and why he believes it’s a better way to make gains while reduce investment risk when a bear market hits.

Answers have been edited for length and clarity:

Q: Explain your fund’s investment strategy.

A: I started the strategy about 20 years ago, and what it’s really designed to do is we actually go in the options market and buy long-dated options to hedge out most of the downside exposure on an annual basis.

Our strategic view at the highest level is we think stock selection and market timing are not very good long term ways to outperform the market. So we think by managing the market risk by trying to eliminate most of the downside we can actually outperform the underlying benchmark over a full market cycle, with less risk.

Q: How do you accomplish that?

A: We go out and we take a hedge position. When you buy a put option, you’re actually able to define that risk on a much more consistent, more confident level to be able to hedge out that risk. (A put option is a contract that gives the owner the option to sell a security at a preset price and period of time.)

For example, if the market is going to go down like in 2008, 35 to 40 percent, then you know exactly what that that put option is going to do to protect that asset. It’s much more reliable and consistent.

We usually buy options at about two years. But at the end of every year, what we’ll do is we’ll sell all our current options and re-hedge using two-year put options.

That allows us to go through bull markets, locking in higher and higher levels in the market. And when you go through bear markets, you’re able to adjust the strike price down and take the profits on the sale of those put options. So we like long-dated options because they decay at a much lower rate than shorter-dated options.

Q: How do you balance hedging with investing in ETFs?

A: About 90 percent of the underlying portfolio gets invested in ETFs and about 10 percent goes into long-dated put options. The second component of the strategy is we sell short-term options against those long positions.

Just as we like to hedge using longer-dated options, we like to try to generate income by selling shorter-dated options against those positions.

Q: The fund is meant to protect against big market drops, but is it ideal for long bull markets like the one we’re currently in?

A: We think, and the research proves this, if you’re able to avoid the big losses in down years, you’re able to outperform over the long haul. The fund is very defensive in nature, but it’s also structured in a way that we think we’re able to outperform the market over a full-market cycle.

Our SMA (separately managed account) track record, which goes back 20 years, has actually outperformed the S&P 500 with less risk.

We’re not looking at saying that we’re going to outperform the market on up years. But we think over full market cycles, it’s still compelling to protect.