Retail investors test the hedge fund waters

IT'S A DILEMMA for regulators. Conventional fund managers have clearly failed retail investors, so should financial watchdogs make it easier for a new breed - hedge fund managers - to woo them? Good hedge funds might do a much better job of properly risk-managed absolute-return investing than the index huggers at the large, established shops. But then hedge funds also have an alarming habit of setting up and closing down a few months later. Are they, in short, suitable managers of retail investors' money?

Some regulators, such as the Financial Services Authority in the UK, think not. But other countries - including Ireland, the US, Singapore, Hong Kong, Italy and most recently France - have already authorized liberalization of marketing rules, though they are yet to see a rush of retail capital to hedge funds.

Institutions are nonetheless making moves to take advantage of new rules.

Hedge funds have been outperforming equity indices for...