For most retail investors the best way of getting into hedge funds is probably the blended funds of funds that are becoming available. These funds buy a whole bunch of hedge funds that supposedly have low correlation of returns. This way if they do an LTCM on you you won't lose the whole lot in one day.

Are they good investments? I have absolutely no idea. Should you invest in them? Well, if you think a "high growth" portfolio with 100% growth assets is nothing to worry about then you might want a look at them, maybe for a small part of your portfolio. Considering their supposedly market-neutral characteristics they might be worthwhile for your play money but I personally won't touch them until we've seen a few years of operation of the blended funds. If they are really market direction neutral then I won't have to worry about buying in at the end of a bull market, unlike stock funds that are most dangerous to buy by the time they have established a good track record, so I doubt there is any risk of missing the boat, unlike standard sector funds I doubt there will be an exploitable contrarian effect for timing purchases.

At the moment hedge funds are attracting major attention from investors all over the world. Investors are used to double digit returns and for them the supposed single digit returns forecast by most analysts simply aren't exciting enough. AXA has brought out a major new blended hedge product, and Colonial First State as well. Deutsch has already launched their new fund of hedge funds and also have a long/short fund and I know of several smaller managers who have had them for a while now. Reading the various financial planning web sites there never seems to be a day when an article doesn't appear about one fund manager or another who is either bringing in a hedge product or seriously looking at doing so. van Eyk research has promised a major survey of hedge funds later this year and when the results of that come out there is likely to be a flurry of action, a tribute to the weight van Eyk carries in the funds management business. As far as I know ASSIRT is already looking at them, I don't know much about Morningstar's efforts in this area.

Other problems with hedge funds include regulatory risk, as many are based in tax havens like the Cayman Islands, rather than a major first world financial centre. Abuses of trustee powers could happen and there probably isn't much that could be done. This is one reason why I've been such a pain in the neck recently in aus.invest when some spammer started promoting overseas based hedge funds where investors have to fly overseas to invest. This carries all sorts of regulatory risks, as are encountered frequently in the often rather sordid world of offshore investments. Of course I was accused of being ignorant, and it was claimed that these hedge funds got good reviews in some hedge fund guide by Standard and Poors. Well, maybe, but considering the fact that hedge funds are already being brought in to Australia through the big fund managers I think the extra protection offered by seeking a product endorsed by the likes of AMP, AXA, Challenger, Colonial First State, ING, Macquarie, MLC, Rothschild and Zurich would carry a little less risk than something offered by a spammer. These companies are spending millions trying to research which hedge funds are worth going into as it has enormous potential to become a major mainstream product, with potentially fantastic commission and performance profit for the fund managers.