And one more from the IHT...how the market for hedge funds continues to change. Both in the U.S., and in Europe as this article illustrates, hedge funds are opening their doors to the average investor. The question is, do these folks know what they're getting into:

Funds: This club is no longer exclusive

By David Clarke

Bloomberg News
TUESDAY, JANUARY 10, 2006

Hedge funds, loosely regulated investment pools designed for people worth more than $1 million, are becoming available to Europe's not-so-rich. In Germany, investors can buy into a hedge fund from Deutsche Bank for as little as E124, or $150. In Britain, individuals are able to avoid restrictions on such investing by buying shares of funds that track hedge funds. Regulators in Britain and Spain are considering opening the industry to more individual investment.

Hedge funds worldwide have more than doubled their assets since 2000 to about $1.1 trillion, according to Hedge Fund Research in Chicago. They tend to take larger bets than conventional funds, aiming to make money in falling as well as rising markets. For Europeans, hedge fund investments may lift returns. Over the five years through November, the CSFB/Tremont hedge fund index advanced 48 percent, compared with a 2.4 percent return for the MSCI world index during the same period.

The funds can also be risky. The Bailey Coates Cromwell Fund, in London, which had about $1.3 billion at its peak, closed in June after losing 20 percent of its value. Severn River Capital Management, a hedge-fund manager, said last week that it would close its two funds and return the remaining cash to investors after declining 8 percent since opening in July 2004. Eric Wood, the chief operating officer, said the principal assets of the company, which had raised $750 million from investors, were the office's two phone systems.

Such troubles are not deterring hedge funds in Europe. Germany introduced new rules allowing asset managers to sell them to individuals in 2004, though advertising is prohibited. At the DWS fund management unit of Deutsche Bank, individuals can invest in the Hedge Long-Short Equity Market Neutral Fund and Hedge Long-Short Equity Opportunistic Fund for as little as E124.

Jan Viebig oversees the funds at DWS, based in Frankfurt. In the Market Neutral fund, Viebig keeps his bets on rising and falling stocks, so-called long and short positions, equally weighted. His Opportunistic fund can wager on rising markets by bulking up on long positions, or on a falling market by taking on more short positions. In a short sale, investors borrow a stock and sell it on the expectation they will be able to buy the shares back in the future at a lower price, pocketing the difference. Viebig currently is betting on rising stocks, expecting economic growth in China and India to lift shares.

Both his funds gained more than 16 percent last year, buoyed by a decision to sell short the stocks of U.S. homebuilders like Toll Brothers starting in July. His expectations that rising interest rates would reduce home sales proved true. Shares of Toll Brothers, based in Horsham, Pennsylvania, fell 32 percent in the second half of 2005.

The volatility of hedge funds has kept regulators like the Financial Services Authority in Britain from allowing the funds to be sold directly to individuals. Fund companies like Pacific Alternative Asset Management of Irvine, California, also are wary of selling hedge funds to individuals. "There are problems with understanding the products," said Stephen Oxley, who runs the European arm of Pacific Alternative Asset Management.

In the United States, the Securities and Exchange Commission requires that hedge fund investors have a minimum net worth of at least $1 million or an annual income of at least $200,000. Most hedge funds have a minimum investment requirement that is typically $1 million or more.

In Europe, regulators and companies aim to limit the risks by allowing investments only in a range of hedge funds, known as funds of funds. In Germany, the BaFin regulator allows such funds to be marketed while prohibiting publicity for those that invest in securities directly, like the DWS funds.

The best-performing equity hedge fund based in Europe in the 12 months ended Nov. 30 was the $210 million Polar Capital Paragon Fund, according to data compiled by Bloomberg. It is managed by Julian Barnett in London. It gained 52 percent after investing in mining companies like Xstrata, the world's biggest exporter of coal used in power plants. That stock rose 41 percent in the period.

Unlike the DWS funds, it is not available to the general public and was sold to "a small number of investors" when it was started in April 2004, Barnett said. "It has got to have clients who understand it can go up 50 percent but can also fall 50 percent," Barnett said.

The original article appears here.

-- MDT

Labels: China, John Whittier, Wood River Capital