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For as little as $10,000, you, too, can invest in a hedge fund -- or, to be precise, in a mutual fund run by a hedge fund manager.
In the latest sign that the elite world of hedge funds is going increasingly mainstream, J. P. Morgan Chase is marketing a new mutual fund, the Highbridge Statistical Market Neutral fund, which will be overseen by Highbridge Capital Management, the $9 billion hedge fund firm it acquired last year.
Morgan expects the fund will appeal to less wealthy investors who could not otherwise invest in a hedge fund. It is the latest example of how hedge funds, lightly regulated investment partnerships that were once exclusively the province of millionaires, have trickled down to the merely affluent.
More and more investors -- from individuals to huge pension funds -- have been persuaded that hedge funds can be an alternative to a lackluster stock market. Assets in these partnerships have ballooned in recent years, climbing to $1.1 trillion. And investment banks are offering the less wealthy a side-door entrance, by lowering the minimum investment required to invest in funds that in turn invest in pools of hedge funds, known as funds of funds.
With the new Highbridge mutual fund, J. P. Morgan has made it even easier for individual investors to have access to the talents of an investment team at a top-performing hedge fund firm.
Still, the bank may have a tough sales job, given the mutual fund's high fees, and the uneven track record that similar mutual funds have had in recent years.
"We are offering individual investors the jewel in our crown," said Glenn R. Dubin, the co-founder of Highbridge, who notes that the investment team that will manage the new mutual fund has turned in the best performance this year of nine teams at Highbridge's flagship hedge fund, the $6 billion Highbridge Capital Corporation.
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The new fund will be managed by a team that includes experts in mathematics and computer science who have built complex computer models for Highbridge over the last three years, indicating which stocks to buy or sell.
Highbridge typically requires a minimum investment of $10 million for the fund, and annual fees of 2 percent of assets and 25 percent of any profits, according to the U. S. Offshore Funds Directory, which lists the performance of hedge funds.
In contrast, the new Highbridge mutual fund will require a relatively modest investment of $10,000, and while the fees are still steep at 1.95 percent annually or more, the mutual fund's managers will not take a share of any of the profits. J. P. Morgan Chase filed a prospectus for the fund on Friday.
Highbridge is joining a growing pool of mutual funds that have adopted hedging strategies -- including making bets against certain stocks to balance bets that other bunches of stocks will go up. These funds, which have $13 billion in assets, have returned 3.4 percent on average through October, according to Morningstar. That comfortably beats the 1 percent return for the Lehman Brothers Aggregate bond index and the Standard & Poor's 500 for the same period. (Given the stability these funds seek they often use bond markets as a proxy.)
But over the longer term, results have been less stellar. Last year, for example, these funds rose 5.4 percent, ahead of the 4.3 percent return of the bond market but less than half the return of the S.& P. index. And over the last five years, these funds have returned just 5.3 percent, failing to beat the Lehman bond index.
"Performance of these funds has been nothing to get excited about," said Dan McNeela, an analyst with Morningstar. Under the circ*mstances, "there are reasons to be skeptical and wait and see how a new fund performs."
Mr. McNeela is also cautious because fees on such mutual funds can be steep. The Highbridge fund carries expenses of 1.95 percent (or 2.45 percent, if an investor wants to defer an upfront marketing fee of 5.25 percent of assets). The average fund investing in stocks of United States companies has expenses of 1.4 percent, according to Morningstar.
Then there are the trading costs -- Highbridge expects to turn over the stocks in its portfolio more than six times each year.
This has also been a rough year for hedge funds, which are surpassing the stock market over all but have lost money in 4 of the last 10 months, according to Hedge Fund Research, a Chicago firm that tracks hedge fund performance. But hedge funds in general still possess a powerful allure, as many have had strong showings since the stock market's collapse five years ago.
Highbridge Capital, for example, rose 27 percent in 2000, a year when the S.& P. fell more than 9 percent, according to the offshore directory. That fund has earned positive returns, frequently in the double digits, every year but one since it was founded in late 1992, according to the offshore funds' directory.
But more recently, hedge funds have faltered, leaving some investors to worry that too much competition has made it hard for these managers to make money.
Through the middle of November hedge funds had returned 5.7 percent, according to an index kept by Hedge Fund Research. That is ahead of the S.& P. 500 return of 1.05 percent through that date, but below these funds' recent pace. To its credit, Highbridge has rebounded from some bumps earlier this year, after a collapse in the market for convertible securities, which are a hybrid of stocks and bonds. Highbridge's main hedge fund was down 3 percent through April.
The fund is now showing a gain of more than 3 percent for the year, according to a person briefed on the results who declined to speak for attribution citing regulatory restrictions on marketing by hedge funds. (Because of these restrictions, there are no performance figures listed on the new mutual fund's prospectus.)
"In the face of what happened in convertible arbitrage this year, Highbridge's team showed how good they are in managing risk," one of the skills that investors look for in a hedge fund, said James E. Staley, who oversees asset management globally for J. P. Morgan.
Mutual fund analysts said that investors might want to wait and see how the fund does.
"There is something to be said for a consistent return, but unless you have an intimate understanding of hedge funds, it's better to go to school on someone else's money," said Roy Weitz, publisher of the Web site Fundalarm.com.
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