Door ajar a bit more on domain of the rich

A new breed of closed-end funds of funds will help investors skirt high minimums that block many from investing in hedge funds, but small investors still need not apply.

For as little as $25,000 at one company, investors will be able to put their money into a closed-end fund that invests in various hedge funds. Hedge funds typically require minimum investments of $1 million.

Closed-end funds of hedge funds are currently being offered by such brokerages and investment banks as UBS PaineWebber Inc. and Lazard FrŠres & Co., both in New York.

But those funds are pushed to their existing client base – specifically investors who are accredited but don’t have $1 million to drop into a hedge fund.

The new funds will be available to a wider audience. In at least two cases, investors won’t even need to be accredited – if the Securities and Exchange Commission signs off on the pending prospectuses. Clients, however, will still need to have a high net worth – $1 million to $1.5 million – before they will be allowed to invest.

The two cases are the Oppenheimer Tremont Market Neutral Fund and the Oppenheimer Tremont Opportunity Fund, advised by Tremont Advisers Inc. of Rye, N.Y. They won’t have the lowest minimums of such funds – $50,000 each – but they look to be particularly accessible to investors.

That’s because unlike most, if not all closed-end funds of hedge funds currently available or planned, the offerings from OppenheimerFunds Inc. in New York will be registered not only under the Investment Company Act of 1940 but also under the Securities Act of 1933.

Thus investors need not be accredited to invest in the funds, both of which are expected to open sometime in the next two months.

It also means that the funds will be sold through a public offering. Most such closed-end funds are sold through a private offering.

Unlike hedge funds, closed-end funds of hedge funds registered under the 1933 act may soon be allowed to advertise.

Attorneys familiar with hedge funds believe being able to advertise is the prime reason for registering under the securities act.

“What you see with Oppenheimer is we’re moving away from what we have seen before, the investment banking world offering this to their more sophisticated, yet not superwealthy clients,” says Robert Rosenblum, a hedge fund lawyer in the Washington office of Kirkpatrick & Lockhart LLP.

According to the prospectus, however, even though the funds may have the ability to sell to non-accredited investors they don’t plan to.

Only investors with net worth, or joint net worth with a spouse, of more than $1.5 million, or who meet certain other qualifications, will be able to invest in the funds.

Mr. Rosenblum adds, however, that because the fund company will at least have the ability to sell the funds to non-accredited investors, it will also be able to advertise the funds, something other closed-end hedge funds of funds registered only under the 1940 act can’t do.

But that’s not necessarily a good thing. “If this thing is going to be sold through a registered broker-dealer, as I suspect it will, the registered broker-dealer needs to worry about suitability,” Mr. Rosenblum says. “If you’re not an accredited investor, is a hedge fund investment really the right kind of investment for you?”

Neither Oppenheimer nor Tremont Advisers – both part of the Mass Mutual Financial Group in Springfield, Mass. -wouldn’t comment on the funds pending SEC registration.

Other fund companies have similar plans to issue closed-end hedge funds of funds.

The soon-to-be-offered Montgomery Partners Absolute Return Fund will look like the new Oppenheimer funds, but will not be registered under the 1933 act, says Bill Santos, managing director of distribution for the Montgomery Partner Series group, a unit of Montgomery Asset Management LLC in San Francisco. As of last week, it hadn’t yet filed for registration.

Of course, because it won’t be registered under that act, it means the fund won’t be able to tap as large an investment pool or be able to market itself as Oppenheimer. But the Montgomery fund can attract investors with its $25,000 minimum investment – one of the lowest around.

Not bad considering that the fund, according to Mr. Santos, will be an absolute-return fund of funds that invests in five distinct strategies spread over 20 to 30 hedge funds.

Financial advisers say they like that those new funds are coming down the pike.

“It’s definitely something I will be looking at,” says Harold Evensky, principal in Evensky Brown & Katz of Coral Gables, Fla., whose firm manages $350 million. “I don’t expect that we’ll be using anything immediately, but I think that it’s going to be an important story.”

Officials at Global Asset Management confirmed that the New York firm launched such funds in April. GAM, however, does not like to publicize the funds because, while they are registered closed-end funds, they are still privately placed.

At least two advisers say that Mark Hurley, president and chief executive of Undiscovered Managers LLC in Dallas, contacted them about a new market-neutral closed-end hedge fund of funds he’s putting together that has a minimum investment of $40,000. Mr. Hurley, however, declined to comment on whether such a fund even exists.

As with all new products, however, there are bound to be a few problems, and financial advisers are already predicting what one of the biggest may be – expenses.

“I haven’t seen the numbers, but my guess is they’re substantially more expensive than the existing hedge fund products,” says Robert Levitt, a principal of Levitt Capital Management LLP in Boca Raton, Fla., who already allocates assets into a number of hedge fund strategies.

“They have to be,” says Mr. Levitt, who is responsible for $170 million in client assets. “The registration alone is going to be a very expensive venture.”