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Retail investors test the hedge fund waters

Retail investors dismayed by the dire performance of straight equity and bond funds look to be ideal customers for hedge fund products. Some national regulators have recognized this and liberalized marketing rules. But it’s not clear that the sector can sustain mass investment. • Julie Dalla-Costa reports

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 some time. Although the Hennessee Hedge Fund Index had its first negative year in 2002 since its creation in 1987, a return of -3.43% doesn't look that bad compared with major world equity indices. The S&P500 finished the year down 22.19%, the Dow Jones Industrial Average was down 16.76%

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