A Blue-Collar Way You Can Get Hedge Fund Returns

Do you have hedge-fund envy? It's nothing to be ashamed of. Who wouldn't want to be able to take part in an investment that's almost exclusively available to the super-wealthy?

But thanks to some hedge-fund look-alikes, you too can invest like a big shot.

The explosive growth in popularity of hedge funds has not been lost on the mutual fund industry. To capitalize on this, the mainstream fund industry has been offering alternatives to hedge funds.

The move is also in anticipation that the Securities and Exchange Commission will raise hedge-fund participation requirements, eliminating millions of potential hedge-fund clients.

The table at the bottom of this page shows 32 funds with hedge-revealing descriptors such as "long/short," "market neutral," "hedged," "risk managed" and "merger" embedded in their names. Except for three that are indicated as primarily institutional funds, all are available to retail investors. Seven of the funds debuted in the past year, indicated by "N/A" for their respective 12-month total returns.

With a few exceptions, the funds on the list do not burden investors with the typical hedge-fund levies of "two and 20" -- 2% of net asset value annually plus 20% of gains in NAV. But for most funds on the list, total expenses are less than they would be for hedge funds, yet are generally higher than those of most other open-end funds.

Factors unique to funds like these might reasonably be expected to have higher-than-normal expenses. This is for reasons such as needing more intensive investment research, as well as the use of some esoteric or international investment vehicles.

The two columns farthest to the right of the table can help identify funds that fit the classical definition of hedge vehicles. The beta coefficient indicates how a fund has tended to respond to changes in Standard & Poor's 500 index, with a reading of 1.10 meaning that the fund has typically gained about 10% more than the S&P during upswings and that it has tended to lose 10% more than the gauge during declines.

The R-squared measures the degree to which fluctuations in the fund have been explained by corresponding movements in the S&P.

Since the typical description of a hedge fund is that it "hedges" against negative moves, it would be expected not to be correlated with the S&P. So the beta and R-squared values can help identify funds that have tended to be true "go their own way" types of investments and not fluctuate in unison with the general market. True hedge funds would be expected to have low beta coefficients and R-squared values close to zero.

"All alpha and no beta" has become the mantra of many hedgies. By that they mean that market risk is not present in their returns, as indicated in positive values for a statistical measure known as an "alpha" coefficient, while the funds' performances are not subject to the ups and downs of the market ("no beta").

So while 10 of the 25 funds for which values are available have R-squared values in the single digits -- indicating that the "market" has almost no correlation with their movements -- seven have R-squared values of more than 60, which indicate reasonable harmony with market moves.

But 18 of the funds have beta coefficients of less than 0.60, meaning the amplitude of their movements has tended to be lower than the market's.

In fact, six of the open-end "hedge alternative" funds have negative betas, meaning they move contrary to the market. For someone wanting a hedge against conventional holdings, that would seem like a constructive hedge. And given the volatility of the market in recent months, there are likely to be investors interested in such insurance.

Hedge Fund Doppelgangers
Name, Ticker, TheStreet.com Ratings Grade *	Annual Expense Ratio (%)	3-Month Total Return (%)	12-Month Total Return (%)	1-Year Beta Coefficient	1-Year R-Squared
1st Source Monogram Long/Short (FMLSX) C	1.98	4.14	11.93	0.47	17
Adv Inn Cir Analytic Glb Lng-Shrt (ANGLX) C	3.92	2.38	6.62	0.61	36
American Century Long-Short Eq A (ALIAX) U	2.63	3.15	3.95	-0.33	6
Calamos Market Neutral Income Fd A (CVSIX) D-	1.25	1.64	7.21	0.24	80
Diamond Hill Financial Lng-Sht A (BANCX) D	1.61	1.81	11.96	0.56	51
Diamond Hill Long-Short Fd Cl A (DIAMX) A	1.78	0.32	6.95	0.41	15
DWS Disc Market Neutral Fund A (APIGX) U	2.38	-1.73	N/A	N/A	N/A
DWS Disciplined Long/Short Gr A (APIUX) U	3.49	2.12	N/A	N/A	N/A
DWS Disciplined Long/Short Val A (APITX) U	3.49	1.24	N/A	N/A	N/A
Franklin U.S. Long-Short A (FUSLX) D	1.91	3.13	3.37	0.63	45
Gartmore Hedged Core Equity Fd A (GHEAX) U	2.94	2.64	N/A	N/A	N/A
Gartmore Market Neutral Fd A (GMNAX) U	4.15	-0.99	N/A	N/A	N/A
GMO Currency Hedged Intl Eq III (GMOCX) B+ #	0.74	4.50	13.76	0.88	66
Highbridge Stat Mkt Neutral A (HSKAX) U	3.74	2.45	7.19	-0.26	29
ICON Long/Short Fd A (ISTAX) U	2.51	5.60	N/A	N/A	N/A
James Advantage Market Neutral A (JAMNX) D	2.57	1.83	-0.23	-0.22	6
Janus Adviser Long/Short A (JALSX) U	3.09	5.33	N/A	N/A	N/A
Janus INTECH Risk-Mgd Stock Fund (JRMSX) C+	0.92	2.80	12.94	0.92	89
JPMorgan Intrepid Long/Short Sel (JILSX) U #	2.95	4.98	14.85	0.90	65
JPMorgan Market Neutral Fund A (JMNAX) D	4.86	4.44	10.04	-0.05	1
Laudus Rosenberg Glb Lg/Sht Eq Inv (RMSIX) D+	3.37	0.50	-1.42	0.23	23
Laudus Rosenberg Value Lg/Shrt Inv (BRMIX) D	3.19	2.53	-1.16	-0.21	6
Mellon Inst Inv Tr Mkt Neutral Fd (SMIMX) U #	9.45	2.93	38.31	0.10	2
Merger Fund (MERFX) D	2.08	2.60	10.14	0.00	0
Old Mutual Analytic U.S. Lng/Sh A (OADEX) A-	1.76	6.46	24.38	0.92	62
Phoenix Mkt Neutral Fund Class A (EMNAX) D-	3.63	0.56	-2.69	0.05	1
Quant Long/Short Ord (USBOX) B+	1.90	4.12	18.45	1.08	88
Robeco Boston Ptrs Lg/Sh Equit Inv (BPLEX) B+	3.65	2.12	28.24	-0.23	2
Rydex Series-Hedged Eqty A (RYSLX) U	2.10	1.59	5.67	0.58	68
Schwab Hedged Equity Inv (SWHIX) U	2.12	2.87	10.47	0.11	3
Templeton Global Long-Short A (TLSAX) C-	1.63	2.47	8.95	0.45	63
TFS Market Neutral Fund (TFSMX) U	5.10	3.67	18.66	0.32	9
* U is unrated. # Institutional fund. Source: TheStreet.com Ratings & Bloomberg (Data as of 5/2/2007).