Money

Crash the Hedge Fund Party

How to (legally) skirt SEC restrictions on investing in hedge funds

By: Pete Gallo
[ Updated: Sep 11, 2008 - 11:27:32 AM ]

Unless you're an "accredited investor"—you're worth a $1 million or you earn $200,000 a year ($300,000 if you're married) the SEC generally forbids hedge funds from accepting your money. Besides going the specialty mutual fund route, you can tap any of these strategies to hit the hedge-fund highway.

Invest in a Canadian Hedge Fund
In Canada, accredited investors can pay as little as C$25,000 to invest directly in a hedge fund and even non-accredited investors can enter the on-ramp if they're able to make a minimum investment of as much as C$150,000 (US$133,500), although rules on hedge funds vary across the provinces. "For U.S. retail investors, looking to Canada is one of the few practical options available," says Ferenc Sanderson, Research Fellow at Columbia University's Program on Alternative Investments, who adds that it's no riskier than investing in a U.S. hedge fund. Most brokerages in Toronto can open an account, and fund descriptions and performance details of many funds are published on globefund.com, a website run by The Globe and Mail, Canada's national newspaper.

Buy a Managed Futures Fund
Scores of famous hedge fund managers made their fortunes by betting on the direction of currencies and commodities. Traders who buy and sell futures contracts in these markets are known as commodities trading advisors and their offerings are called managed futures funds. Some take on investors for as little as $5,000 and tend to perform well when stocks and bonds are tanking. Though volatile in the short term, they have performed well over longer periods: in the five years ending in mid-June, one well-known index was up a cumulative 52 percent, versus the S&P 500's 10 percent return. Still, their steep fees would make even a hedge fund pro blanch.

Buy Shares of Goldman Sachs
This investment bank is a clever way to play the growth of hedge funds, says banking analyst Dick Bove of Punk Ziegel & Co., a boutique Wall Street firm. Goldman makes a lot of money lending stock to hedge funds and executing their trades. Some analysts say Goldman is itself a giant hedge fund: In the fiscal second quarter, its own trading and investments yielded $7 billion, more than two-thirds of revenue. Its stock was up about 40 percent in the 12 months ending in mid-June. You may already own it: Many big mutual funds, including Fidelity Growth & Income Portfolio, hold the stock.