While the track record of the Aston/Lake Partners LASSO Alternatives Fund (ALSOX) only stretches back to its inception date of April 1, 2009, the LASSO (Long And Short Strategic Opportunities) strategy was employed successfully by Lake in a separate account portfolio with a GIPS-compliant track record dating back to inception on December 31, 1998. From inception, the LASSO composite produced a cumulative return of 79% versus 16% on the Standard & Poor's 500-with LASSO having one-third the daily volatility. In 2008, when the Standard Poor's 500 stock index collapsed 37% in value, ALSOX lost a relatively modest 16%.

"It's a kinder, gentler hedge fund," says Lake. By law, registered investment companies are limited in the amount of leverage and illiquid securities they are permitted to hold. This blunts the effects on returns in a downturn, but limits upside potential in good times, making it attractive to those skeptical about the economic recovery and rise in stock prices in 2009 and so far in 2010.

Investors in mutual funds mimicking long/short hedge funds can also take comfort in the fact that registered investment companies require independent custody of their securities positions, so you avoid the risk of fraud seen in private placements. Even some of the biggest due-diligence firms did not detect the Bernie Madoff fraud.

On the other hand, you also are buying securities and don't get the same covariance afforded by investing in hard assets like real estate or interests privately held companies.

What it comes down to is that hedge funds, real estate, private equity and other direct alternative investments impose a heavy burden of due-diligence responsibility and a layer of expenses that seem hard to justify for independent advisors. When the cost of a mistake can be so great, that outlier risk of a fraudulent deal appears to be unacceptable.

However, when the combination of excess returns and complacency again take hold, the pendulum will swing back. Then, my friend from the neighborhood will probably be laughing at me.

And, in the meantime, he makes a strong argument: "If advisors are not putting investors into deals that are hard to research, then what's their value add?" he asks. "This is precisely what they should be doing on behalf of their clients."

Editor-at-large Andrew Gluck, a veteran financial writer, owns Advisor Products Inc., a marketing technology company serving 1,800 advisory firms.

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