For Hendrickson, risk control is a matter of both fund structure and stock selection. His portfolio generally has about 25 long positions and about 25 short, though on a dollar basis he stays around 30% net long. At the core of his holdings are eight to 12 "workhorse" names, including Hornbeck Offshore (HOS). The company has invested heavily in a fleet of offshore supply ships, which serve the oil and gas industry. Day rates for such ships have been low, but if they ramp up -- as Hendrickson believes they will -- the company's free-cash-flow yield on the current stock price could rise to 20%.

These positions tend to be "hairy" companies that don't fit neatly into a traditional sector, or face issues that take a lot of time and legwork to understand. One such company that Hendrickson likes now is Rambus (RMBS). The memory-technology licensing firm is stuck in a long legal dispute over whether the big chip makers have used its technology without paying up. After reading thousands of pages of legal documents, Hendrickson sees big upside and enough support to limit downside in the stock. "We started buying the stock at 21, were still buying at 5, and it's at 16 now. We think the stock could go to 40 given what they are owed in royalties and settlements. Even if there are further legal delays, we think their low-power/high-bandwidth chip technology will see adoption [by smartphone makers] next year," justifying the current price. And a legal loss would, if nothing else, cut the company's big legal bills.

He also likes the potential of Deckers Outdoor (DECK), maker of UGG-brand footwear. Hendrickson's research shows that demand for its boots is holding up, despite concern that they are too pricey for the current economic environment.

New York-based Weinger, 36, now sees the possibility of juicy short returns in solar-panel makers such as Suntech Power (STP), Q-Cells (QCE.Germany) and First Solar (FSLR). A producer-by-producer analysis of the supply of polysilicon versus regional demand for solar power leads Weinger to conclude that price could soon be at or below the marginal cost of production. Producers with high costs, leverage or both are headed for trouble. The solar industry isn't alone. "The market is afflicted with the most bizarre case of amnesia. Our short book is filled with irrationally overvalued companies that would qualify as financially distressed in a normal credit market," he says.

New York-based Weinger, 36, now sees the possibility of juicy short returns in solar-panel makers such as Suntech Power (STP), Q-Cells (QCE.Germany) and First Solar (FSLR). A producer-by-producer analysis of the supply of polysilicon versus regional demand for solar power leads Weinger to conclude that price could soon be at or below the marginal cost of production. Producers with high costs, leverage or both are headed for trouble. The solar industry isn't alone. "The market is afflicted with the most bizarre case of amnesia. Our short book is filled with irrationally overvalued companies that would qualify as financially distressed in a normal credit market," he says.

On the long side, Weinger likes Comverse Technology, which trades on the pink sheets under CMVT. This software and information-technology outfit was snared in the options-backdating scandal. New management is in place, but the company hasn't yet filed audited financial statements with the Securities and Exchange Commission. When it relists, the shares will again be eligible for traditional long-only and mutual funds, giving the share price a boost. Given that Comverse has net cash of nearly $300 million and majority stakes in two free-cash-flow-generating companies, Weinger thinks the shares, now trading around 8, are worth 15 to 20 each.

During the rally, GCA saw opportunity in health-care debt, particularly the bonds of acute-care companies like HCA (private, with publicly traded bonds), Tenet Healthcare (THC) and Vanguard Health Systems (also private with public bonds). The debt had a great run as the companies cut costs and bolstered their balance sheets. But they gained so much that GCA sold its positions.

The $50 million-plus portfolio is now positioned more defensively, focused on telecom, media and packaging companies that have delivered strong results. Among them are two packaging outfits with exposure to nondiscretionary consumer spending: Crown Holdings (CCK) and Berry Plastics (private with public bonds). Another is satellite-service provider Intelsat (private with public bonds).