James Hedges has spent more than 10 years selling investors on the merits of hedge funds, so he's not that surprised the investments have grown in popularity. But even he couldn't have guessed the change in attitude would be so sudden and far-reaching.

"Up until the middle to end of 2000, I was out there beating my head against the wall, trying to make people understand," Hedges says. "All of a sudden, there was this sea change-a turning of the tides ... It's like night and day."

There's still no telling how far the mainstream investment community will go in embracing hedge funds, or how prepared the hedge fund market is for absorbing large inflows of capital. In the meantime, Hedges' firm, LJH Global Investments LLC in Naples, Fla., is among the many players, both large and small, that are jockeying for position as the leaders in the hedge fund and alternative investment markets.

As these firms see it, hedge funds may be just what some clients need to boost portfolios that continue to be weighed down by the underperformance of the traditional equity markets. With hedge funds still operating in a secretive and unregulated arena, some firms are setting themselves up as the middlemen who will provide the due diligence and monitoring to enable new hedge fund investors and advisors who recommend them to sleep well at night.

And one of the keys to the race, Hedges says, is winning the hearts and minds of advisors and their clients. "We are focused very keenly on the advisor intermediary market and international investors," Hedges says.

He also expresses confidence that the interest in hedge funds is more than a fad-especially because companies such as Schwab, Putnam and Fidelity are placing heavy bets on the market. "The thing is, it's inevitable now," Hedges says. "There has been such adoption by institutions and private banking, there is no going back."

As far as Hedges is concerned, it's about time. A 1989 graduate of Rhodes College, Hedges founded LJH Global Investments in 1992 as a family office and consulting practice that specialized in hedge fund investments.

Serving a clientele made up of mostly old-money families, LJH Global Investments researched hedge fund managers and their strategies, cherry-picking funds as they built portfolios for clients. Although the firm has since branched out into other areas, such as rolling out its own fund of funds products, due diligence is still at the heart of what the firm does, Hedges says.

Other changes also have occurred. At the time Hedges started the firm, it was dealing with a hedge fund universe that numbered about 600. Assets under management were $50 billion and about five hedge fund strategies predominated. Today, there are about 6,000 funds, asset are at about $600 billion, and 15 to 20 strategies are used.

And in the early 1990s, the market was comprised of small clusters of high-net-worth individual investors, with virtually no involvement by institutional players, Hedges says. "It used to be a relationship-driven cottage industry whispered between high-net-worth investors at a cocktail party," he says. The firm's new generation of clients is "newly liquid entrepreneurs who just sold a business for $400 million."

Market changes began gradually, culminating in a turning point in spring 2000, when the Nasdaq crashed and the tech-fueled bull market started grinding to a halt. Equity returns dried up, investors began looking elsewhere for consistent returns, and hedge funds were one of the places where their gazes focused.

Now that they have the attention of the mainstream investment community, LJH Global Investments and other firms are scurrying to make newcomers more comfortable with an investment world that can appear shadowy when compared with mutual funds.

Toward that goal, LJH recently announced the launch of the LJH Advisor Advantage Program, which offers training specifically designed for financial advisors. It includes a broad overview of the hedge fund market, as well as sessions that zero in on specific strategies used by portfolio managers.

"By working with advisors, LJH hopes to educate a large number of industry leaders so that they can, in turn, best serve their clients needs," Hedges says.

But the primary way LJH and other firms are making hedge funds more palatable is by presenting them in a fund of funds format-groupings of a dozen to two dozen funds hand-picked and monitored by an intermediary. For advisors and their clients, Hedges says, "the only way to play the game is through fund of funds vehicles." That's why the firm has partnered with several firms to launch a variety of fund of funds products in recent months.

In March, for example, LJH Global Investments announced it was teaming with Phoenix Investment Partners Ltd. of Short Hills, N.J., to create a registered fund of funds product with investment minimums as low as $25,000 to $50,000. Under the partnership, LJH will develop and manage the fund and Phoenix will handle marketing and distribution.

Teaming with a firm like LJH represented the most efficient way to introduce a retail product, says Phoenix Executive Vice President Don Segalas. "Given their experience, their depth of research capabilities and desire to penetrate the high-net-worth marketplace, this was a good collaboration," Segalas says.

Phoenix ruled out starting its own fund of funds or buying one as too expensive, risky and time-consuming, he says. Speaking about why the firm chose LJH as a partner, Segalas says: "There are relatively a small handful of firms that have been around since the early 1990s that manage in excess of half a billion in assets and have a strong market reputation."

LJH's independence is one reason Caprock Capital Advisors of Houston decided to partner with the firm in introducing a fund of funds for its clients, says Caprock principal Karen Worthen Dixon. "What we found is a number of firms that claimed to be like LJH receive compensation by the underlying hedge fund managers to promote them," she says.

Caprock worked with LJH to introduce a fund of funds in January that currently is comprised of six funds, including ones that use market neutral, distressed companies and convertible arbitrage strategies. As of the end of April, the fund was up 2.4% for the year, Dixon says. "It's doing what it's designed to do, and that is deliver consistent positive returns," she says.

In addition to finding management talent and giving their clients access to them, LJH also helped Caprock get comfortable with hedge funds and the secrecy that comes with them.

Clients, for example, had to accept that their investments might be tied up for at least a year and that the names of fund managers and their holdings would often remain secret. "Where LJH may know the positions, the end-client oftentimes does not," Dixon says. "So our clients had to get very comfortable with LJH and their analytic team, which they did."

That team is comprised of seven strategists, each responsible for analysis related to two or three hedge fund strategies, says Shoaib Kahn, LJH's senior vice president for research. Most hedge funds use any of about 16 different strategies, he adds. By giving one analyst responsibility for a specific strategy, it gives the due-diligence process more focus, he says. "In addition, we're able to ask the intelligent questions and build a relationship with a small group of fund managers," Kahn says.

Due diligence on the typical hedge fund takes about 10 to 12 weeks and includes several on-site visits, interviews with managers and analysts, an analysis of its track record and an evaluation of back-office sup port and infrastructure. Less than 5% of the funds reviewed make it to the firm's list of investable funds after due diligence, he says. At any given time, LJH considers less than 200 of the 6,000 or so existing hedge funds to be worthy of client investments, and five to six funds may drop off the acceptability list in any given year, Kahn says.

Through this process of finding the "best of the best," LJH's centerpiece fund of fund product last year achieved a 7% return, Kahn says. "A lot of risks are mitigated by hedge funds, contrary to popular belief," he adds.

One of LJH's challenges will be to retain autonomy and independence in a burgeoning market-that is expected to experience some consolidation. LJH already has seen its staff grow 50% in the past year-and-a-half, to a total of about 27 employees. In addition to its Naples, Fla., headquarters, the firm has an office in London and recently opened one in San Francisco. Asset growth has been running at about 50% a year.

Despite that growth, the firm's central mission hasn't changed, says LJH Chief Operating Officer Willis Williams. "Our job is to find the cream of the crop."