In Focus

April 24, 2006

uperfund says it all! That's the name of a hedge fund for the masses requiring minimum investments of just $5,000. Though based in Europe, the fund is eager to add to its 4,000 U.S. investors. It claims to have 50,000 total investors.

But why should anyone invest in Superfund, with its $5,000 minimums? Does the average investor really need to invest in Superfund's program - managed futures, letting investors make such esoteric plays as shorting currencies or betting on cattle prices?

Likewise, why is the mutual fund industry so eager to market its new "hedge fund tactics"? According to an article in the Wall Street Journal, these tactics include short selling, buying securities on margin and using complex derivatives. Fund companies like Allianz Global Investors, Julius Baer Holding, and Alliance Capital Management now are seeking shareholder approval to add hedge fund tactics. Others, like Oppenheimer Funds and Principal Global Investors, whose funds already can employ hedge fund tactics, are doing so with increasing frequency. Still others, like Janus Capital Group and American Century Investments, are launching new funds to pursue hedging strategies. Investors must beware, especially of mutual funds that, after performing poorly, now seek more flexibility to employ hedge fund tactics. Surely, more risk, added fees and costs will result.

In fact, do hedge funds or fund of funds make sense at all? Not from a performance perspective. Hedge fund performance has been far from spectacular. Since the stock market bottomed in 2002, hedge funds, as measured by the Credit Suisse/Tremont Hedge Fund Index, underperformed the S&P500 two out of three years. From 1993 to 2005, the CS/Tremont Index virtually matched the 10.5% total return generated by the S&P 500 Index.

So don't be fooled! Hedge funds and funds of funds are great, but not for the average investor. Instead, they are great for the hedge fund managers who reap huge asset-based and performance-based fees, and for others whom investors pay to recommend and monitor those managers!

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James J. Eccleston is a securities attorney, representing customers as well as brokers and brokerage firms nationwide in arbitration, litigation and regulatory matters. He maintains an informative website at www.FinancialCounsel.com. He is an equity partner with Shaheen, Novoselsky, Staat, Filipowski & Eccleston, and can be reached at 312-621-4400.