More Funds Are Hedging Their Bets

The Alpha Hedged Strategies Fund was introduced in September 2002 and is one of the few that utilizes assorted alternative investing styles. The more typical fund in this category sticks to a single strategy, which is another reason why Schultheis sees growth ahead.

"A number of single style funds like the (ARBFX Quote)Arbitrage Fund, (CVSIX Quote)Calamos Market Neutral Fund and the (MERFX Quote)Merger Fund have closed due to lack of capacity," says Schultheis. "That means there's a strong demand out there for a new type of product."

The Arbitrage Fund and the Merger Fund employ a hedge fund strategy called "merger arbitrage," whereby a manager simultaneously buys the stock of a company being acquired and sells short the stock of the company doing the acquiring. Merger arbitrageurs look at the risk of the deal not closing on time or at all. Because of this slight uncertainty, the target company's stock will typically sell at a discount to the price that the combined company has when the merger is closed, thus creating a so-called risk less profit.

That's not to say mutual fund companies will start stocking the shelves with new hedge fund products to feed the retail masses. The regulatory and operational headaches of marrying mutual and hedge funds still remain unattractive to many potential managers, which is why there are less than 20 funds that use hedge fund tactics.

And there is still the issue of educating the Main Street investor about what it means to use some of Wall Street's fanciest financial tricks. Rock Canyon Top Flight's Ferrell, for example, directs his $18 million long/short fund towards "sophisticated investors looking to fill out a larger investment program. And only in a tax-advantaged account."

And Ferrell's dead serious about the tax-advantaged account warning. Stocks in his fund turn over nearly every two weeks compared to the Morningstar average of a little over once a year.