Not Just for the Super-Rich Anymore

Once reserved for the financial equivalent of royalty, hedge funds increasingly are becoming available to the merely well-off.

Responding to intense demand, financial firms such as brokerages and mutual fund companies are devising ways for more investors to get into hedge funds or similar investments.

As a result, investors with as little as $100,000 have a shot at participating in a range of hedge funds, though they still must meet overall wealth and sophistication criteria.

“It has really filtered down from the super-wealthy to just the run-of-the-mill wealthy,” said Jim Berens, managing director at Pacific Alternative Asset Management Co. in Irvine.

The primary entry point for the less-well-heeled is through so-called funds of funds. These are pools that invest in a variety of hedge funds the same way that mutual funds buy a cluster of stocks.

The idea is to reduce risk through diversification among different managers. Funds of funds also can open the doors to coveted hedge funds that otherwise may be off-limits to regular investors.

“We have access to the biggest names that individuals may have trouble getting into” on their own, said Madhav Misra, head of hedge-fund investments at Citigroup’s alternative investments unit.

Even so, funds of funds don’t come cheap. Although hedge funds normally keep 20% of any profits they generate, Citigroup, for example, gets an additional 10% after a basic minimum has been earned, Misra said.

A few mutual fund complexes lately have rolled out hedge-fund-like offerings to keep wealthy customers from fleeing. Firms such as Invesco and AIM have funds that employ some hedge-fund techniques--such as short selling of stocks--that may fan returns in a lackluster stock market.

These mutual funds don’t take 20% of profits. But they aren’t as freewheeling as true hedge funds. For example, they’re legally prohibited from using short selling or leverage (borrowed money) to the same degree as many hedge funds.