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ment adviser with the Securities and Exchange Commission (SEC). In the United States, an accredited investor is one who has a net worth of at least $1 million or an annual income of at least $200,000 for two consecutive years ($300,000 for a married couple). Under Section 3(c)(7) of the Investment Company Act of 1940 a hedge fund can now take up to 500 qualified eligible participants. Section 3(c)(7) came about with the passage of the National Securities Market Improvement Act in October 1996 and went into effect in June 1997. Qualified eligible investors must have $5 million in securities/investments, and institutional investors must have at least $25 million.

INSTITUTIONAL INVESTORS

I interviewed three large institutions from the United States, Switzerland, and Japan to get their feedback and experiences with hedge funds. While one would expect major differences due to geographic and cultural differences, some main themes existed.

Fund of Funds Approach/Diversification

The fund of funds approach is a common and comfortable way for institutions to start. Due to time zone differences, language hurdles, and complex strategies, these companies feel a fund of funds approach is a wise way to go.

Following the Long-Term Capital Management crisis, diversification of managers and strategies is seen as a way to reduce risk. In addition to taking the fund of funds approach, the Japanese institution allocates to 30 managers, while the Swiss insurance company allocates to 90.

Private Equity and Hedge Funds Viewed in the Same Light

The institutions view hedge funds and private equity closely and expect similar characteristics from each. For example, Swiss Life Insurance Company made a 5 percent allocation to hedge funds—the same amount it made to private equity. The California Public Employees Retirement System (CalPERS) is interested in crossover or hybrid funds that contain a component of private equity and equity