Mutual Funds That Act Like Hedge Funds

With regulators raising the bar for hedge-fund investors, there's never been a better time to consider mutual funds that try to produce consistent returns by zigging when the market zags.

Hedge fund fees have always been off-putting -- they typically charge hefty 2% management fees and also keep 20% of any profits they earn for investors. Investors may also object to having their money locked up for a year or more.

But now the Securities and Exchange Commission wants to redefine who is rich enough to invest in hedge funds; earlier this month it proposed redefining "accredited investors" as those with a net worth of $2.5 million, compared with $1 million currently.

In reality, you have to be more than just comfortably well-off to invest in hedge funds, since $1 million is just the price of admission for many of them. But in recent years it has become easier to get a foot in the door through funds that pool investor capital to invest in other hedge funds. The proposed rule would severely limit the potential investors in these funds of hedge funds.

Still, the concept of producing positive returns in good markets as well as bad is appealing, particularly to those who suffered through the tech stock wreckage a few years back. And investments designed to steadily outperform money market funds by several percentage points are likely to appeal to many investors. So for those unfortunates with a net worth of $2.4 million or less, I have screened TheStreet.com Ratings' database of open-end mutual funds for those meeting the following criteria:

• Beta coefficient between 0.50 and minus 0.50 (meaning fluctuations in the fund will be at less than half the amplitude of ups and downs in Standard & Poor's 500 index).
• R-squared values of less than 20 (meaning that movements in the funds are explained to a degree of less than 20% by the ups and downs of the S&P 500).
• Positive alpha coefficients (meaning the fund has tended to achieve positive "risk adjusted" total returns over the past three years).
• Minimum initial investment of no more than $100,000. (Most on the list have minimums of no more than $5,000.)

Alternatives to Hedge Funds These mutual funds have returns that are virtually uncorrelated with the S&P 500 index
Name, Ticker and TSC Ratings Grade	1-yr. Total Return (%)	3-yr. Alpha Coef. (%)	3-yr. Beta Coef.	3-yr. R-Sq.(%)	3-yr. Std. Dev'n(%)
Allianz NACM Pacific Rim A (PPRAX) C+	27.68	17.88	0.25	0	41.64
Caldwell & Orkin Mkt Opportunit (COAGX) E+	5.67	0.33	-0.29	8	4.76
Diamond Hill Long-Short Fd Cl A (DIAMX) A+	18.82	12.16	0.48	19	8.00
Federated Market Opportunity A (FMAAX) D	6.03	2.85	0.03	0	4.90
Fidelity Real Estate High Income Fd (N/A) C	9.90	8.05	0.04	1	6.67
Forester Value Fund (FVALX) D-	3.74	8.65	-0.27	3	11.35
Franklin Templeton Hard Curr Adv (ICHHX) D-	11.01	0.33	0.28	15	6.00
Gabelli ABC Fund (GABCX) C-	12.16	2.20	0.17	18	1.99
ING PIMCO Total Return S (IPTSX) D+	5.62	0.70	0.05	2	3.00
James Advantage Market Neutral A (JAMNX) D	-1.81	3.09	-0.13	2	6.00
JPMorgan Multi-Cap Mrkt Netral A (OGNAX) D+	6.29	0.84	0.14	4	3.33
Laudus Rosenberg US LgMdCp L/S Inv (RMNIX) D+	7.35	2.66	0.02	0	5.49
Laudus Rosenberg Value Lg/Shrt Inst (BMNIX) D	0.30	0.19	-0.02	0	4.90
Nations Mort & Asset Backed Port (NMTGX) C-	6.60	0.43	0.06	17	2.42
Pinnacle Value Fund (PVFIX) C	10.94	7.07	0.33	16	5.83
Robeco Boston Ptrs Lg/Sh Equit Inv (BPLEX) C+	13.26	10.43	-0.08	0	7.78
Select Environmental (FSLEX) E+	10.73	0.04	0.22	11	13.64
Data as of 11/30/2006.

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