It's time to hedge your bets

Hedge fund is barely coded stock market speak for running huge risks, hitting the limits of futures and options strategy and then going beyond - and for threatening to bring the world financial order crashing down.

Even those with little interest in markets can quote George Soros's big attack on the pound in 1992 and the cracking of Long Term Capital Management in 1998 which caused stock and share chaos.

Most hedge funds are available only to investors with £500,000 or more. But now they are on offer for as little as a minimum £5,000 - and you can say pants to the Inland Revenue by investing the first £7,000 in an Isa.

So what are hedge funds doing in Isas?

Officially, the rules prohibit funds based on derivatives such as futures and options. But a loophole has been found: investing in existing funds through an offshore company. This creates funds of funds which, promoters claim, reduce the risk.

What good are they?

Hedge funds can be used for more than out and out gambling.

Some funds aim for reduced risk with the promise of a constant income stream higher than available elsewhere; a number promise to chalk up gains using various tactics if shares are falling or static - many hedge fund managers say investors should have some protection against a bear market.

Other stock and share Isas will just fall in value. Hedge funds offer an extra choice.

How are they managed?

Independent financial adviser Hargreaves Lansdown, whose website (www. hargreaveslansdown.co.uk) features information on hedge funds, says there are six major strategies. Funds may use all or some of these tactics which include: • Equity neutral or long/ short. Fund managers pick a sector, for example, oil. They then buy (go long) shares in the company they like most and sell (go short) in the others. It's a bet on quality coming out on top.

• Short selling: anticipate an area such as tobacco where legislation might impact or technology where a bubble could burst. Sell the shares using futures and options.

• Equity hedge: look for overpriced shares like etoys and underpriced companies such as ToysRUs. Then wait for nature to take its course.

• Investing outside the shares market. Managers can opt for commodities, bonds, or mortgage or credit card loan backed securities.

Who has hedge funds?

Morley Fund Management launched a fund aiming at high income. NDF Adminstration has a Protected Hedge Growth Plan which promises the return of capital in five years' time; Henderson and Jupiter are among those planning funds.

What do the regulators think?

They are not too happy: The Financial Services Authority has warned consumers against "exotic funds" - which includes hedge funds. They can be "difficult to understand, have unclear costs and charges and may well not be appropriate for the majority of consumers".