Traditionally aimed at wealthy clients, hedge funds are increasingly being targeted to average investors. But as SINCLAIR STEWART and PAUL WALDIE report, many don't understand the risks involved.

When Thelma van der Steen's financial adviser suggested she put $60,000 in Portus Alternative Asset Management Inc., she thought she was buying something safe like a guaranteed income certificate. She had no idea she was getting into hedge funds.

Adrian Mastracci, investment counsel at Vancouver’s ‘fee-only’ KCM Wealth Management, says, "Anything can go wrong with hedge funds -- the volatility is simply much higher.”

"To me, hedges are something that's in the garden. I'm not too familiar with that term. But he showed us all these graphs and everything," said Ms. van der Steen, 74, who lives with her husband in Toronto. "I knew nothing about it."

Portus collapsed into receivership in March, leaving the van der Steens and nearly 30,000 other investors in limbo. The receiver overseeing Portus still isn't sure when, or if, investors will recover their $800-million in investments. "We live in a little apartment here, we are not big rich people, $60,000 is a lot to us. It might be nothing to other people, but it is to us," she said.

With stock markets sagging, ordinary Canadians have been flocking to alternative investments, including hedge funds. The Portus debacle and the problems plaguing Norshield Asset Management Ltd. have been a wakeup call for the fast-growing industry.

In a recent Decima poll of 1,018 people, one-third said they intended to invest in some kind of alternative vehicle in the next year. However, that same poll showed increasing concerns about the lack of regulation of hedge funds. Two-thirds said they were not confident in the regulatory oversight of hedge funds. By contrast, 51 per cent had confidence in regulations governing income trusts and indexed-linked GICs.

"Anything can go wrong [with hedge funds] -- the volatility is simply much higher," said Adrian Mastracci, president of Vancouver-based KCM Wealth Management, who doesn't recommend hedge funds to his clients. "And if you can't stand the heat, you've got to get the heck out of the kitchen. I know some of them are going to blow up, I just don't know which ones."

But others say hedge funds offer consumers a sensible alternative and that the problems surrounding Portus and Norshield should not be allowed to taint the entire industry.

"People are investing in these things for a reason and most of the investment that has gone into them, I would say, is really intelligent [and] sophisticated in the sense that they know what they are doing and there is a reason why it is in their portfolio," said Jim McGovern, chairman of the Canadian chapter of the Alternative Investment Management Association, or AIMA.

Hedge funds have traditionally been aimed at wealthy clients. However, in recent years the industry has created products that allow average investors access to hedge funds for as little as $500. Today, Canada has one of the most developed retail hedge fund sectors in the world. Hedge funds open to average investors make up 54 per cent of Canada's $14.1-billion hedge industry (not including investments in hedge funds by pension funds). In 1999, less than one-quarter of all funds were accessible to average investors.

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