Fall 2006 issue of Horizons

Therefore, theoretically speaking, a hedge fund should outperform a mutual fund in a bear market because of these short positions and hedges and underperform in a bull market. However, as I mentioned earlier, a hedge fund can invest in anything and its strategy may not be as described above. Also, since different hedge funds may employ different strategies, consider diversifying your investment in hedge funds into several different ones to mitigate risk in case one strategy is not in favor. Some of the broad categories of hedge funds you may find are arbitrage strategies, event-driven strategies and directional or tactical strategies. Each of these has many sub-strategies, all with different risk and return characteristics.

Do your homework before investing in a hedge fund! Do not just rely on what the salesperson tells you. Quite often they are as much in the dark about what the hedge fund does as you are due to the lack of disclosure requirements. At a minimum, consider the following: 1. Read the offering memorandum. 2. Understand how the fund's assets are valued. 3. Ask questions about fees. 4. Understand any limitations on your right to redeem your shares or partnership units. 5. Research the background of the managers. 6. Be sure you understand the level of risk in the fund's strategy. More return generally means more risk. 7. Talk to your tax advisor. Hedge funds issue complex Form K-1s that may require extension of your return, added tax return preparation costs, and additional reporting requirements.

Questions? Contact Mike Ferman, CPA Managing Director, RubinBrown Advisors 314-290-3211 mike.ferman@rubinbrown.com

RubinBrown Advisors may only transact business in any state if we are first registered, excluded or exempted from the applicable registration requirements. Follow-up, individual responses or rendering of personalized investment advice for compensation will not be made absent compliance with applicable state registration requirements or an applicable exemption or exclusion.

6 • summer 2006 issue