Tremont Capital Management Inc.?s Asset Flow Report for the Second Quarter of 2006 showed a $38.3 billion net inflow across all investment styles for the same period with fixed income arbitrage increasing at the fastest rate, growing by 7.28 percent. Positive net inflows are estimated at a total of more than $954 billion for all hedge fund strategies measured.

Recent hedge fund industry developments point to increased use of hedge funds as alternative portfolio strategies as well as illuminating the continued growth in new funds:

@EDITRULE:The industry appears to be growing even faster than mutual fund groups. In the first half of 2006, Cayman reported a record number of new hedge fund company registrations. According to Walkers, an offshore law firm, Cayman is the hot spot for the global hedge fund industry with 80 percent of the world?s hedge funds, more than 7,500 groups, registered with the Cayman Island Monetary Authority.A recent United States pension bill that may have been signed into law (at this writing) by President Bush would allow hedge funds to manage more pension-fund money. US pension funds represent more than 40 percent of all institutional money invested. While the hedge-fund industry already manages billions of dollars in public and private pension plans, there have been imposed limitations of 25 percent of the total assets of any pension-fund proposals due to the fiduciary constraints of ERISA (Employee Retirement Income Security Act of 1974). In 2004, the United States Securities and Exchange Commission (www.sec.gov) was successful in applying a rule that required most U.S. hedge fund advisers to register with this investor protection agency, provide information on clients and submit to SEC regulated audits. According to Hedge Fund Street, Philip Goldstein of Bulldog Investors challenged this ruling, spending more than $300,000 of his and his partners? own money. He was successful in defeating this action when last week a federal appeals court recently overturned the rule; the SEC said it would not appeal against the court decision. Goldman Sachs Asset Management was listed at the top of the heap in fund size ($21 billion) for the Hedge Fund 100 by Alpha magazine. In total, the Hedge Fund 100 firms oversaw $720 billion in single-manager hedge fund assets as of December 31, 2005, an increase of nearly 27 percent from the $568 billion in assets managed by the 100 firms on the list a year ago. The Hedge Fund 100 firms account for nearly two thirds of the hedge fund industry?s $1.1 trillion in assets.Hedge fund management is no longer perceived as a game of navigation through uncharted territory. Industry icons such as Mr. James Simons of Renaissance Inc. have managed the phenomenally successful Medallion Fund for more than 25 years. Investment Managers at universities with impeccable reputations, such as Yale, and public pension funds the size of California Public Employees Retirement System (CALPERS) have employed alternative strategies for many years, in order to achieve better than average performance for their endowments.. For investment managers to be able to select and monitor the best of the best hedge funds, transparency and disclosure amongst professionals is paramount. Often criticised for being under regulated, the hedge fund market exacts its own compliance with the use of inherent industry standards and long-term relationships employed all responsible parties.While still often misunderstood by investors, the measurement and assessment of risk in personal portfolios is more important than ever before. We appear to have become far more attuned to capital preservation than seeing spectacular returns, or are we?

When discussing the performance and low risk, low volatility with a prospect a few weeks ago, the measurement of rate of return was fully dissected. We explained that the particular portfolio we were reviewing had not lost any value during the last bad bear market. You may remember that during that time some brand name fully- invested long-only equity portfolios lost more than than 60 percent of their market value, while others averaged a negative (30 percent). It was a painful time for investors, particularly those just starting pension plans.

Thus, having reviewed the annualised return for the year 2002, of almost four percent with very low risk, the comment was made that this performance was not impressive. It hardly made a ripple when it was pointed out that when interest rates were at one percent, investors were only too happy to achieve 2.5 percent to three percent. How quickly we forget that without incurring significant risk and terrific swings in investment returns, high returns are not handed out on a plate. Managing a portfolio for capital preservation and low risk means moderate to good success during positive market up ticks and the ability to sleep at night at all times. A hedge fund?s investment policy is almost universally predicated on the concept of absolute returns. In common sense terms, the statement ?do I have more money now than I had three months ago?? has tremendous relevance. There are three categories among which the various investment strategies are defined: directional/tactical, event driven, and market neutral. According to Pioneer alternative Investments, this group is comprised of global macro, managed futures, long/short equity, dedicated short bias and emerging markets. The largest and most common strategy used is the long/short equity model and it is this strategy along with market neutral that we shall discuss in depth in the next article. It involves the use of margin lending, short interest, borrowing ?street? name shares, currency trading, fundamental and technical analysis, and investment manager savvy.

In the meantime, for your homework, if you so choose, use your search engines to go to www.Investopedia.com, I urge you to educate yourself about your investments, your future financial security depends on it. Plus, my goal is that you end up knowing more than I do.

Not much time left before the investor quiz on September 16!