Pretty soon they'll start giving away free toasters.

As hedge funds seek to develop more accessible products to investors with some $1 million to $5 million in net worth, more and more funds are breaking from the traditional secrecy and voluntarily creating funds to register with the

Securities and Exchange Commission.

The newly registered Alpha Strategies I fund moves hedge funds even more into the mainstream. Alpha Strategies will employ hedge fund tactics while operating as a traditional, open-end mutual fund.

Alternative Investment Partners, a firm established by two executives from Kinetics Asset Management, says in its SEC registration that its Alpha Strategies I fund will strive for absolute returns using a variety of hedge fund strategies, such as event-driven, relative value, arbitrage, long/short equity, distressed securities and high yield.

A flurry of such offerings was expected back in late 1997 when the Internal Revenue Service's so-called "short-short rule" was lifted. The short-short rule prohibited traditional mutual funds from earning more than 30% of their annual gross income on securities held fewer than 90 days. That translated to virtually no options trading, short-selling, arbitrage or other plays that require nimbleness. Funds that didn't comply with the rule were slapped with a 35% corporate tax bill on the fund's entire gain, as well as a tax on the dividends paid to shareholders. (Funds that complied were able to pass the capital gains on to investors, who then paid ordinary income tax on the distribution.)

But despite the much-anticipated killing of the 60-year-old rule, the market wasn't exactly flooded with new mutual funds employing these short-term hedging techniques. Then again, the rule was repealed during a booming market, when going long was a pretty good idea.

"We're definitely seeing much more of these types of funds now," says Scott Cooley, a senior analyst with Morningstar. "One reason is that they'd have to be managed really incompetently to not have better returns than their long peers."

Like many hedge funds, most mutual funds tend to specialize in one particular hedging strategy. The successful stalwart

Merger Fund

(MERFX) - Get Report

MERFX, for instance, specializes in merger arbitrage. In other words, the Westchester Capital Management fund buys the shares of the targets of announced mergers and acquisitions and frequently shorts their suitors' stocks. While the fund suffers in low-dealmaking environments such as this one (its down 4.29% in the past year), it has a low correlation to the market and a good long-term track record -- its three-year and 10-year returns are 7.59% and 10.36%, respectively. The fund, which had been closed for a number of years, reopened to new investors in October 2001.

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Newcomers that arrived after the short-short rule was revoked include AIM's Small- Mid- and Large-Cap Opportunities funds

(ASCOX)

ASCOX,

(AMCOX)

AMCOX and

(LCPAX)

LCPAX. These funds, which have all closed to a good run recently, can leverage up to 30% of assets and use another 25% to short stocks. Equity positions are based on AIM's earnings-momentum approach. The most established of the three, the Small Cap Opportunities fund, is down 6.94% over the last 12 months, but still ranks in the top third of its category, according to Morningstar. Its three-year annualized return is 16.64%, beating 95% of its peers.

These funds aren't cheap, though. "The costs are generally higher in funds that execute these strategies," Cooley says. "And that's a pretty high hurdle to overcome." Typically, hedge funds have management fees that run far lower than retail mutual funds -- since most of hedge fund fees vary according to the fund's performance.

The Alpha Strategies I fund -- which, given the multiple strategies employed, can be compared to a fund of hedge funds, which always carry higher costs -- will have a whopping 3.99% expense ratio, according to the SEC filing. That figure encompasses a management fee of 2.5% of assets, a 0.25% 12b-1 marketing fee and the 1.24% operating expense. The fund will also charge a 2% redemption fee (essentially a back-end load, common among hedge funds) for any redemptions within one year of investment. The minimum investment is $25,000.

The Merger fund has a 1.34% expense ratio and just a $2,000 initial minimum investment, with no further minimums. The AIM Opportunities funds have expense ratios from 1.15% to 2.12%, and typically require a $10,000 initial investment, although all three funds are now closed to new investors.

The fact that hedge fund tactics are employed by mutual funds means greater transparency, which is good. But it doesn't mean that they're safer investments, Cooley warns.

"I suspect a lot of individual investors don't realize what the risks are in these funds," Cooley says. "That doesn't mean they're bad funds -- it just means you have to match the appropriate investment to the right investor. These funds aren't for everyone."

In keeping with TSC's editorial policy, Beverly Goodman doesn't own or short individual stocks, nor does she invest in hedge funds or other private investment partnerships. Goodman welcomes your questions and comments, and invites you to send them to

Beverly Goodman.