Hedge funds for the masses are one of the latest hot trends in global asset management. In the United States, hardly a month passes without news of another offering aimed at the broader market. Theconcept has taken off in Europe, and it is migrating to Asia as well. But should investors be buying these products? Amid their surge in popularity, some sobering statistics have just been issued.According to CSFB Tremont, which tracks the $600 billion global hedge fund industry, as many as 800 funds, about a fifth of the global total, shut down last year. This past week, the U.S. Securitiesand Exchange Commission which is considering extending its oversight to the hedge-fund industry put up a Web site disguised to look like an offering from a hedge fund to warn unsophisticatedinvestors about fraud. There is an attraction to hedge funds now, with the market down, Susan Wyderko, director of investor education at the SEC, told Bloomberg News. There is the thought that hedgefunds would be able to make money, whereas traditional investments would not. It is no surprise that hedge funds look appealing. After three years of a brutal bear market, they are in theory, atleast supposed to make money in both up and down markets. The average hedge fund returned only 3.2 percent last year, but that was compared with a 23 percent loss for the Standard & Poor’s500-stock index and equally dismal performances for most other major indexes. Hedge funds aim to get returns both by holding stocks to take advantage of a rising market, and selling them short, atactic that profits from a falling market. They also use strategies such as merger arbitrage and make bets on commodities and currencies; some also use leverage to beef up their bets. Long reservedfor the wealthy who could plunk down minimums of $500,000 to $1 million, hedge funds are now being promoted to the moderately affluent who can come up with as little as $5,000 to $10,000 in Europe,and $25,000 in the United States. They are mostly funds of funds that spread their risk and hold down volatility by taking stakes in as many as 25 hedge funds with a range of investing styles. Assetmanagers have widely differing definitions of who qualifies to be a shareholder in a fund of hedge funds. Some define moderately wealthy as a person with a net worth of $1.5 million, but many havefar lower requirements, and, depending on the product and the country you are in, some have no financial guidelines. The funds are typically sold as a diversifier that is not correlated with thegeneral stock and bond markets, with a suggested allocation of 5 percent to 10 percent in a portfolio. Do investors know what they’re getting into? Following is a brief look at the state of play invarious parts of the globe and some advice for those who are considering a foray into these funds. In the United States, big banks and money managers are the major players so far. Among them are theOppenheimer Tremont Market Neutral Fund and Opportunities fund; the UBS PaineWebber series of six portfolios, and the Montgomery Partners Absolute Return Fund, from the California money manager. EvenCharles Schwab & Co., which made its name as a broker to middle America, has jumped on the bandwagon, although its Schwab Hedged Equity Fund is run by a single manager and not a fund of funds.British investors are not as well off. They can opt for one of a handful of funds of hedge funds listed on the London Stock Exchange, or they can buy an unlisted offshore fund through a financialadviser and face heavier taxes. The dilemma, said Jacob Schmidt, director of research at Allenbridge Group PLC, a London institutional hedge fund consultancy, is that the listed funds have had poorperformance, hampered by their small size and high fees. On top of that, as closed-end funds they have consistently traded at discounts to the value of their holdings. From a tax point of view, it’sbetter to do listed products, but they are of inferior quality, so it’s a Catch-22, he said. By contrast, he noted that unlisted offshore funds have not only performed better but are open-end,trading at their net asset values. On the Continent, German investors are snapping up certificates, typically priced at 10,000 ($10,700), that are linked to indexes of funds of hedge funds, asecuritized structure that avoids punitive taxes imposed on direct shareholders in actual funds. Indeed, up until now, there were no taxes on profits of a certificate held longer than one year. (Apending change will levy a 15 percent tax, however.) Even more popular are certificates sold with a capital guarantee, such as a separate bond. These have been actively promoted by the major Germanbanks, who are also their issuers, led by Deutsche Bank, the most aggressive. Elsewhere in Europe, funds of hedge funds and single strategy funds are familiar products in the private banking industryof Switzerland, where regulations are also more flexible. Even the conservative Dutch are showing an interest. Francis Verpoucke, an executive with the asset management unit of Credit Agricole, saidthat the group had been marketing its Green Way Arbitrage fund of funds to Dutch pension sponsors. But after noting growing interest in retail business, it registered the fund in the Netherlands andis making the rounds of private banks. While the prolonged bear market has stimulated interest in hedge funds elsewhere in the world, Asian investors continue to be lukewarm about such products andfund houses have so far been slow to bring absolute return products to the table. But in November 2002 three funds were authorized by the regulatory authorities in Hong Kong. JF Funds introduced itsJF Greater China Absolute Return Fund in December, a single strategy, equity long/short product that does not invest in other funds. HSBC Asset Management has introduced its Global Strategy HedgeFund, a fund of hedge funds with a $10,000 minimum. Unlike the funds in Hong Kong, the new kid on the block in Singapore has taken an ultra- conservative tack. The DBS Absolute Return Fund has beenstructured as a guaranteed fund with a seven-year tenure and 1 percent guaranteed interest per year. And just this past week, Platinum Capital Management announced the approval of twoguaranteed-return offerings for sophisticated investors those with at least $100,000 to put down. But while ground rules differ from country to country, and among individual funds, the caveats forinvestors contemplating a leap into a hedge fund are much the same: Watch out for fees. The focus has been on lower entry minimums, but annual management charges remain steep anywhere from 1 percentto 3 percent and on top of that there is another layer of fees assessed by subfunds. Then there is the 20 percent cut of profits taken by traditional hedge funds: some promoters are maintaining it,others have lowered it, and some have eliminated it. Moreover, the capital guarantees so popular in Europe and Asia add another cost, said Narayan Naik, director of hedge fund research at the LondonBusiness School. All told, Schmidt warned, Fees can eat up all the returns and leave you in negative territory.

Check the liquidity of your investment, or how easily you can redeem hedge-fund shares. It varies from fund to fund, but generally, you will have to wait. In the United States, the Montgomery Partners Absolute Fund lets shareholders cash out every quarter, while Schwab is unusual in allowing its investors to sell shares any time. In Europe, GAM’s funds of hedge funds allow shareholders to redeem monthly, as do the two new offerings from HSBC and JF Funds in Hong Kong, but German investors who own certificates can sell them in an active secondary market any time. Size matters. Some analysts say that a fund managed by a large bank or a big seasoned player is less likely to blow up, or if it does, that it could afford to bail out shareholders. Size has other advantages. To run a hedge fund of funds conceptually is easy, but in reality you need a lot of people and great reporting facilities. There’s a minimum size to do that, said David Smith, chief investment director of the multimanager team at London-based GAM. Don’t be afraid to ask questions. There are a lot of people trying to get rich on this trend, Smith said. You need to look at how long they’ve been in this game, the long-term track record and transparency. I can tell you that there are no dumb questions.

Indeed, the regulatory authorities in all these jurisdictions are concerned that even the people selling funds of hedge funds do not understand the risks. The guys who advise rich people know a lot, but they’re not the ones who are going to advise the retail investors, Naik said. Another concern is that funds could be misrepresented to retail investors, an issue that has delayed decisions on opening them to a wider market in Britain by the Financial Services Authority.. In the United States, the National Association of Securities Dealers, noting its concern that unsophisticated investors were rushing into funds of hedge funds, has warned brokers to tone down their marketing. The idea of funds of hedge fund is to give the man in the street an opportunity, Schmidt said. The reality is that all the issues haven’t been addressed.

– Jane Parry contributed to this article from Hong Kong. * For more information: ALLENBRIDGE HEDGEINFO. Web site:www.hedgeinfo.com GAM FUNDS. Web site:www.gam.com MAN ALTERNATIVE INVESTMENTS. www.manip.ch OPPENHEIMER TREMONT FUNDS. Web site:www.oppenheimerfunds.com SCHWAB HEDGED EQUITY. Web site:www.schwab.com