PRESS DEMOCRAT: Who should invest in hedge funds?

BIDERMAN: Only individuals with a substantial net worth, and by that I mean well over $5 million, plus a temperament suited to experiencing above-average risk, should consider hedge fund investing. (Hedge funds invest in sometimes exotic securities in an attempt to protect large portfolios from market swings). There are some institutional investors, such as pension plans, insurance companies and college endowments that find hedge funds helpful because it improves the risk-reward trade-off of their entire portfolio.

PRESS DEMOCRAT: Most hedge funds avoid registration with the SEC by allowing only "accredited investors" -- individuals or married couples with a net worth exceeding $1 million, individuals with an annual income of more than $200,000, or married couples with an annual income of more than $300,000 -- to invest. Are hedge funds appropriate for average investors?

BIDERMAN: Hedge funds are not appropriate for average investors, whom I define as individuals with less than $1 million to invest. More than enough mutual funds provide virtually everything that hedge funds do, usually with much lower fees.

PRESS DEMOCRAT: The purpose of some hedge funds is to protect investors from swings in the market. Are there other ways that investors can protect themselves?

BIDERMAN: The main purpose of most hedge funds is to enrich the fund managers, not to protect investors from swings in the market. Most of our clients at TrimTabs are professional, either hedge or mutual fund portfolio managers. In my opinion, less than 200 fund managers of any kind are capable of effectively outperforming the market over time. Nearly all individual investors should steer clear of hedge funds.

If investors want to short the market, various mutual funds will serve this purpose. For example, the Rydex group offers funds that short the Nasdaq-100 Index or the S&P 500 Index.

PRESS DEMOCRAT: If an investor decides to invest in a hedge fund, how can he or she choose the correct fund?

BIDERMAN: If you have millions to invest, the big guys will take your phone call. Hedge Fund Research Inc. (www.hfr.com) provides data on over 3,300 hedge funds, including performance and fee information. This firm does charge a small fee to access its database, but its fee is insignificant if you have millions to invest.

PRESS DEMOCRAT: The investment adviser for Global Money Management did not inform investors of past regulatory actions against him. How can investors ensure that a hedge fund is legitimate?

BIDERMAN: Investors should do their homework, which involves contacting the prime broker as well as the custodian of the assets. Investors should also call current and former investors and employers. It is amazing how many investors will do far less research on a money manager than they would on a contractor for a home improvement involving a fraction of the money. In my experience, the best way to avoid being hurt is to tune out anyone who offers you an investment that seems too good to be true.

PRESS DEMOCRAT: What are funds of funds, and who should invest in them?

BIDERMAN: Funds of funds invest in various hedge funds for their investors, adding another layer of fees. Often fund of funds prove the point that plenty of people are willing to charge those who feel ignorant about investing hefty fees to do nothing more than what people capable of accumulating millions of dollars -- even by inheritance -- can do for themselves. They may, however, allow diversification among hedge funds or access to funds not accepting new investments.

PRESS DEMOCRAT: Some financial advisers claim that investors who never heard of hedge funds a few years ago are now clamoring to invest in them. Why is this happening, and how should financial advisors respond?

BIDERMAN: Hedge funds have received a lot of publicity and there are studies which say they can reduce portfolio risk with more return than other diversified investments. Investors should understand financial advisers' hedge fund relationships. Some financial advisers put their clients into hedge funds from which the financial advisers receive part of the fee as a percentage of assets as well as part of the fee as a percentage of any profits. Hedge funds can be more profitable to financial advisers than traditional mutual funds or other forms of money management. For obvious reasons, investors should not invest in any hedge fund where this conflict of interest exists.

PRESS DEMOCRAT: Most hedge funds charge a management fee of 1 to 2 percent of assets and a 20 percent share of any profits. Are hedge funds worth these fees? How do their fees compare to those of mutual funds?

BIDERMAN: I know of no evidence that hedge funds as a group outperform mutual funds as a group. Even before fees are deducted, the odds are heavily against most hedge funds outperforming the market. Nevertheless, hedge funds tend to cost investors much more than comparable mutual funds because hedge fund managers receive 20 percent of any profits. Whether a hedge fund is appropriate for a wealthy investor is an individual choice.

PRESS DEMOCRAT: An SEC staff report on hedge funds published in September recommends that hedge fund advisers be required to register with the SEC. This proposal would subject hedge funds to regular SEC inspections and examinations, but it would not affect how they invest. Do you support this proposal?

BIDERMAN: In my experience, the only outcome of more regulation is higher legal fees for everyone involved. More regulation will not prevent fraud. Only doing your homework and not trusting people who offer things that are too good to be true can protect you.

The bottom line: anyone capable of accumulating large sums of cash is capable of managing his or her own assets. Inheritors of vast wealth should be more concerned about asset conservation than asset growth. The people who profit most from hedge funds are those who run hedge funds and those who receive fees for investing other people's money into hedge funds.

This interview was conducted via email by Press Democrat Staff Writer Mary Fricker.