Dow Jones 10810.67 +60.91 11:40 am PST, February 8, 2006  NASDAQ 2257.07 +12.11 For info, visit access.smallcapnetwork.com S & P 500 1259.80 +5.02 Change your subscription status here Russell 2000 717.55 +0.37 VOLUME 06: ISSUE 11  Features: Hedge Fund - Mutual Fund on Steroids? Past Winner Reboot. In our weekend edition, we will be issuing a timely new Trading Alert on one of our biggest-winner past companies. Investors will want to pay keen attention to this call as last time around, the activity delivered returns of several 100 percent with in a very short period. We feel that the progress made since then coupled with the current potential will make for a great short and long-term trade. This exceptional past winner looks an excellent candidate for a significant second lightning strike. And now we return to our regular and always fascinating programming. A generic definition of Hedge Funds is virtually impossible to come across, but suffice it to say the fairly accurate perception is that they are like Mutual Funds on steroids. Or maybe crack. Your call... Hedge Funds are mostly the province of the wealthy, fearless investors for whom risk-- while a cost of doing business--must be aggressively managed. While not yet structured for us average folk, these vehicles do serve us all well by adding liquidity and trading activity to the markets. While Hedge Funds are for the most part quite esoteric in their approach, one common misconception is that are all run by a bunch of cowboys who have no regard for actually managing a portfolio and just indiscriminately bet large amounts of other peoples' or borrowed money while rapidly moving from one complex opportunity to another.  Au contraire; at least for the majority. Interestingly enough, Hedge Funds share quite a simple premise: protect the downside and the upside will take care of itself. Over the last 17 years, if you add up the down quarters in the S&P 500, the cumulative total exceeds 113 percent. The Morningstar Average Mutual Fund Index fared worse, down more than 115 percent. Using the VAN Global Hedge Fund Index the cumulative negative return for the same period was just over 10 percent. Here's the chart: For now, investors in Hedge Funds must be well-heeled qualified folk or institutions--as defined by the SEC-- with a large net worth and the ability to dump in the minimum, which is usually between $250,000-$1 million and the number of investors is limited to between 100-250. The growth rate of these vehicles is roughly 20 percent per year and is approaching 10,000 offerings with assets somewhere between several hundred billion and over $1 trillion. These ain't your daddy's Mutual Funds. Hedge Funds can be specific types; from highly aggressive growth and market timing genres to Market Neutral and Value approaches. And typically, the manager takes a large chunk of the profits--perhaps 20 percent--as opposed to the standard remuneration of the average Mutual Fund Manager. With this as motivation, it shows why Hedge Funds have such a stellar record in down markets. A manager of this type of vehicle wouldn't survive very long (or get paid) if he/she delivered a couple of big down years. Mutual Fund managers on the other hand get paid regardless of returns. The other fallacy is that Hedge Funds use massive amounts of borrowed money and bizarre, risky derivatives to leverage their returns. These types of Hedge Funds are known as Global Macro Funds and, while they tend to get the press, they actually only make up around 5 percent of the sector. Most hedge Funds use limited amounts of derivatives for hedging, or not at all. The majority uses no form of leverage. One of the most popular Hedge Fund strategies is short selling, something some Mutual Funds can do on a very limited basis or not at all, depending on their mandate and appropriate SEC regs. Since Hedge Funds are beyond the purview of the SEC, due to the profile and sophistication of their investors, virtually any strategy is fair game. These Finds may short sell, use derivatives such as puts, calls or futures, buy distressed securities, employ fixed income strategies, swap currencies, trade global bonds, including junk, arbitrage, buy microcap stocks, play in any global market, scalp IPO's as well as try to profit from event driven and special situations. There's not much they can't do. For this reason, and the great remuneration potential for managers, Hedge Funds attract the best and brightest to their ranks. Even though Hedge Funds pay special attention to protect the downside, they are interested in individual strategies that in their totality will deliver good returns in any market to their investors. Interestingly, the magic to hedge funds is more to protect capital than to deliver stellar moves in good times. For that reason, they should only make up a part of a large diversified portfolio. As the chart shows, the returns were best when the S&P looked ugly and acted badly. While Hedge Funds are beyond the reach of most investors, for those who can afford the entry fee and requirements, a position may make sense more as a ' stop loss' type vehicle with returns in good times as the gravy. It all gets down to diversifying risk. No matter whether you can afford to take advantage of a Hedge Fund or not, that's a lesson we can all take to the Bank.   We Value Your Feedback Got comments, questions or suggestions? Send 'em on over: Editor@smallcapnetwork.com If you wish to send a written request or inquiry, please send it to our physical address: TGR Group, LLC 4653 Carmel Mtn Rd Suite 308 #402  San Diego, CA 92130 Lightning to Strike Again? As mentioned over yonder, this weekend we'll be issuing a Trading Alert on a company that we have covered extensively in the past. Last time we booked a return of several 100 percent in a few months and, with all that's gone on since then, looks to be time to have another go. Don't email me and ask the name. My lips and keyboard are sealed...at least until the weekend. Should be fun and profitable...   CISCO Moving Nicely In our Elephant piece last December one of the neat stocks we profiled was Cisco. Then, $17.50, now $19.35. A snappy 11 percent return in a few weeks. The company announced good numbers last night and the shares launched up over $1 this am. Took a bunch of other stocks along for the ride. Nice to see this one move as it seemed woefully undervalued as we mentioned late last year. Hopefully, this household name is on its way. Stay tuned.   Googlemania Gone? Given the kicking Google has taken over the last couple of weeks, I'd be interested to know your thoughts. I'll put up a piece on the SCBLOG in a while and you can leave your comments. Is the back broken on this one or is it the buy of the year? Analysts were consistently raising their targets and then, got' surprised' by Google's high tax rate number and the roller coaster reversed. Will it recover? Moderately inquiring minds need to know... Subscribe Information is power and timely information is profitable. Become informed and profit from SmallCapDigest Profiles and Trading Alerts by becoming a Preferred Member today. There is no cost associated with your email subscription. 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