With returns on both bonds and stocks dwindling, investors are seeking higher ground. Increasingly, that means that their money finds its way into alternative investments like hedge funds.

Recent headlines trumpeted the move by Taft-Hartley pensions to transfer some of their $360 billion to hedge funds. When conservative unions show up at hedge fund doors, can conservative accountants be far behind? The answer depends on which research you read.

Sixteen percent of advisory firms use hedge funds now, and almost 40 percent expect to in the near future, according to a survey conducted by Rydex's AdvisorBenchmarking.com. Tiburon Strategic Advisors reports significantly lower numbers among CPAs. "The response of CPA advisors to hedge funds has been underwhelming," says Chip Roame, managing principal and founder of Tiburon Advisors of Tiburon, Calif. "Today, the incidence of use is less than 1 percent, and only 4 percent expect to add hedge funds in the next couple of years."

Large firms use hedge funds more often than small firms. The Rydex study clocked a 31.2 percent usage rate among those advisors with more than $500 million in assets, versus around 7 percent for smaller firms. The CPA study might have included a greater number of smaller firms in the 1,400 respondents.

The nature of the CPA advisor could be another explanation for the discrepancy. "Our results might be partly because of the nature of CPAs," says Roame. "They're probably conservative both about whether they will use hedge funds and whether they'll boast about the fact of it."

Whatever the real growth number is, the hedge fund industry is changing to meet greater demand among advisors to individual investors. Managers offer registered hedge funds of funds, hedge fund strategies in traditional open-end mutual funds, and hedge fund index funds.

Rydex is one company moving into the arena with its Sphinx product. The closed-end fund offers investors direct access to 41 underlying managers with varying strategies, benchmarked to the S&P 500 Hedge Fund Index.

"Several things attract investors to the Sphinx," says James Erceg, director of investment products at Rockville, Md.-based Rydex Funds. "The low minimums of $25,000, the comfort of the S&P brand and the third-party oversight of risk and valuations broaden the audience for this fund of hedge funds."

Rydex recently expanded it's national sales force and announced contracts for Sphinx with LPL, US Bancorp/Piper Jaffray, and Fidelity National Financial. Rydex's other funds offer hedge-like strategies of shorting equities and bonds.

The ProFunds family is frequently named as a major player in the traditional open-end mutual fund category of hedge fund offerings. Rydex's Sphinx claims one clear advantage for investors. "CPA professionals might appreciate that investors in this fund receive 1099s at the end of the year, versus K-1s for hedge fund partnerships," says Erceg.

The lower minimums of these offerings make the products more palatable to lower-net-worth investors. While investors still need the $1 million in net worth to buy the retail-oriented products, the lower entry point makes it reasonable to allocate a percentage of smaller portfolios to the alternative strategies.

Pushing new products

"There's lots of activity in the advisor marketplace," says Ryan Talag, product manager for hedge funds at Morningstar Direct. In March this year, the fund tracker rolled out the new product aimed at institutional investors. It includes data collected on 1,500 hedge fund partnerships. "Both traditional hedge fund managers and firms like Oppenheimer and Goldman Sachs are creating product for the retail marketplace."

Morningstar's hedge fund information is not yet available on the advisor platform. Early research revealed little demand among advisors for the additional information. "We found only a small portion of advisors were using hedge funds because of the investor accreditation hurdle," says Talag.

The new products offer distinct advantages to the retail client, in addition to the lower minimums. Both open-end mutual funds and the registered hedge funds of funds offer the added security of Securities and Exchange Commission oversight, as well as transparency of fees and holdings.

Still, the steep learning curve keeps smaller advisory firms out of the market. "We're still in the missionary stages with regulated hedge funds," says Talag. "Advisors have to take the time to learn the products and how to work into client portfolios."

Both Talag and Roame point to other new product introductions as guides to broadening acceptance of the retailized hedge fund products. "Early-stage first adopters of hedge funds are now getting comfortable with the product," admitted Talag. "But mass marketing of hedge funds today is about where ETFs were eight years ago."

Roame points out that exchange-traded funds gained traction among CPAs because of the low costs and tax efficiencies. He points to the slow growth of separately managed accounts as a possible model for the future of hedge fund products in the CPA advisor marketplace. "Separately managed accounts are probably two to four years ahead in the product evolution cycle," Roame says. "Despite all the media headlines about the popularity of those products, they're still only in the range of 4 percent of total mutual fund assets."

Part of the reason for Roame's prediction of slow growth is that the new products can be hard to understand simply because of their structure. "In the hedge fund of funds, it's difficult to know what you're buying," says Roame. "The structure offers a diversified 'thing,' but an advisor can't be sure what that thing is."

While some hedge fund managers are stretching upward to meet the growing demand of pensions, others target the retail end of the investor market. Chicago-based Grosvenor Capital Management reportedly is expanding its offerings for the pension market. Europe's largest hedge manager, Man Group, launched additional retail offerings through its Man-Glenwood division.

Not all expansions into the retail market have been successful. Aspen Strategic Investors of Atlanta recently exited the retail market, stating that for a small firm like theirs, the blue-sky registration fees were unmanageable.

Whether the number of CPA advisors using hedge funds grows by 3 or 30 percent, Rydex is moving ahead. Erceg says to watch for SEC filings of new products in the near future. "Expect that the new ones will have a familiar look and feel," he says.

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