HEDGE funds, once the preserve of the ultra high-networth, are becoming more and more accessible to the everyday investor. There are still barriers to entry, however, with most still demanding very high initial investment to participate.

A way in for smaller investors is via a fund of funds approach. In effect, an investment vehicle is set up, which itself invests in a portfolio of different hedge funds on behalf of its investors. This strategy reduces the risk of an investment in a single hedge fund, with the downside of reducing the returns available.

So, what does a hedge fund do? It can be described as using an investment process that involves hedging techniques to reduce risk on what would otherwise be a very risky strategy. We have all heard of the term ghedging your betsh, and that is a realistic view of what hedge funds actually do.

With a betting analogy as an example, the odds on Middlesbrough beating Sunderland at the weekend were quite low, given the majestic attacking display on show at Borofs last home game.

A single bet on the Boro had the chance of a very decent return on the stake, or the possibility of losing the entire stake. Clearly, this represented high risk. What if, then, a bet was also placed on Sunderland winning at the same time.

Provided that there was a result for either team, the bet would still be in the money, albeit at a lower return. The ultimate strategy would be to bet on both teams to win and also a bet on a draw, but the bookmakers are not stupid.

Just one of the many types of hedge fund strategies uses the above analogy in that if a share price goes up, money is made, but also if the share price goes down, money is made. A loss would be made if the share price does not move, which represents a nil-nil draw scenario, based on the cost involved of putting in place the hedging facility. The chances of a share price standing still are slim, making the trade worthwhile.

The most common form of hedge fund strategy is the long/short position. This involves going long in one or more stocks, and acting to the contrary in one or more other stocks, by going short. A short position is effectively selling an investment that is not held, with the intention of buying it back at a lower price at a later date.

Without wishing to dwell on the main casualties of last weekfs share price movements, an interesting couple of days when Alliance and Leicester suffered an attack of the hedge funds is worth noting. Last Monday, the share price fell by 31 per cent and the next day rose by 32 per cent. For an existing holder of Alliance and Leicester, the overall effect over the space of forty-eight hours was a potential loss of nine per cent. If a hedge fund was on the right side of a short position on the Monday, and a long position on the Tuesday, the return was 63 per cent.

This is clearly an extreme example, but with hedge funds accounting for as much as 50 per cent of equity trades, it goes to show the power that these funds exert.

Anthony Platts is an assistant director in the Teesside office of Wise Speke, and can be contacted on 01642- 608855. Views expressed are the authorfs own and are not necessarily held throughout the Brewin Dolphin Group.

Wise Speke is a division of Brewin Dolphin Securities Ltd, a member of the London Stock Exchange, authorised and regulated by the Financial Services Authority. Prices, values or income may fall against investorsf interests. You should be aware that you may get less back than you invested. Investments may not always be suitable for all individuals.

If you have any doubts, you should consult a professional advisor.