Steven Lehman, whose Federated Market Opportunity Fund has posted top returns in 2008 after five years in the middle of the pack, put half...

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Steven Lehman, whose Federated Market Opportunity Fund has posted top returns in 2008 after five years in the middle of the pack, put half his assets into cash to ride out what he says is already a bear market.

Lehman doubled the $1.9 billion fund’s holdings in cash and equivalents to 49 percent of assets in the past year. That’s triple the average of rival asset-allocation funds, which invest in stocks, bonds and liquid securities such as money-market funds, according to Chicago research firm Morningstar.

“We are in a secular bear market, and bear-market psychology is the opposite — sell the rallies, and go short on equities,” Lehman said from his office at Federated Investors in Pittsburgh. “We went into the year much more cautiously positioned.”

Lehman’s fund advanced 3.2 percent this year through Feb. 27, beating 97 percent of peers, Morningstar’s data show. That compares with a decline of 5.7 percent for the U.S. benchmark Standard & Poor’s 500 index.

The top in the category is the $669 million Wilmington Multi Manager Real Asset Fund, which has 2.2 percent of assets in cash, and climbed 5.7 percent this year through Feb. 27. The fund, managed by Rodney Square Management in Wilmington, Del., has more than half its assets in Treasury Inflation-Protected Securities (or TIPS).

Since reaching a record high on Oct. 9, stocks have slumped on concern that the credit crisis and housing slump threaten to push the economy into a recession. A bear market is usually defined as a decline of 20 percent from the most recent peak.

Lehman, known as the “house bear” by colleagues for his persistently gloomy view, said he expected U.S. stocks to tumble as financial companies write down more securities linked to bad debt.

Lehman has invested 4 percent of the fund in so-called put options that rise in value as U.S. stocks decline. The buyer of a put option bets the price of the underlying asset will fall below the predetermined exercise price.

Lehman has about 1 percent of the fund invested in U.S. common stocks.

Apart from cash and put options, Lehman has 15 percent of the fund in equity-linked notes, his highest percentage ever in the debtlike securities, which pay a coupon based on the value of the underlying equity.

His biggest holdings include equity-linked notes issued by securities firms Lehman Brothers Holdings of New York, bearing an 18.2 percent coupon, and Zurich-based Credit Suisse Group notes with a 15.8 percent coupon.

“I wouldn’t want to be an equity holder, but I don’t fear being a debt-holder,” he said.

The Federated Market Opportunity fund has Morningstar’s second-lowest rating of two stars. The fund has a three-year Sharpe ratio of -0.06, compared with 0.19 for peers, according to the firm. A higher Sharpe ratio means better risk-adjusted returns.

“Steve has historically done well when the market has struggled,” Katherine Yang, an analyst with Morningstar, said in an interview.

Lehman’s fund climbed 7.3 percent over the past five years, trailing 58 percent of competing funds over that period, according to Morningstar. The S&P 500 gained 12.5 percent in the same period, including reinvested dividends.