The Alpha Hedged Strategies Fund (ALPHX), which is a mutual fund of hedge fund managers, currently has nine sub-advisers and ten active strategies. The fund is managed by Lee Schultheis and is a little over three years old. The fund’s unique structure eliminates a double-layering of fees, in effect reducing the overall costs the hedge fund of funds fees to approximately 4.0% (5.0% if you include shorting expense - you should according to the SEC) from a typical 6.0% to 8.0% fee level, not including shorting expenses.

To date, the fund has been successful during a difficult time for hedge fund of funds of delivering a low volatility pattern of return (low standard deviation) while producing a high single-digit return since its inception. We believe the fund will deliver a very competitive return over the next decade, and that the stock market will be fortunate to deliver returns that will, at best, keep up with inflation. However, the stock market’s returns will be far more volatile.

In order to better understand the fund, it is necessary to understand the investment strategies of the underlying sub-advisers, as well as how the fund is constructed. Listed below are the sub-advisers and strategies utilized within the fund.

AEM employs an international long/short equity strategy, managing $38 million in it, which is designed to be plus or minus up to 20% net long or short international equity securities. It is intended to capture inefficiencies in the market pricing of international equity securities traded primarily in the U.S, especially American Depository Receipts. It is not designed to take significant net exposures to any particular country, region, or currency.

The portfolio manager, Vince Fioramonti, joined AEM in 2002 as a partner and is the lead manager of the international equities team. From 1994 to 2002, he was a senior portfolio manager with Aeltus Investment Management, overseeing all international equity portfolios and managing over $700 million in equity assets as well as the team of professionals. Mr. Fioramonti has been in the investment industry since 1988.

A second strategy employed by AEM is an international REIT long/short equity strategy, which is designed to be plus or minus up to 20% net long or short REIT instruments. It is intended to capture inefficiencies in market pricing of U.S. commercial real estate through publicly-traded securities. The strategy attempts to have its long positions outperform its short positions, whether the market is rising or falling, to obtain its return. Employing this strategy is portfolio manager Kevin Means, who founded AEM in 2000 and is the lead manager of the real estate securities investment team. From 1994 to 1999, Mr. Means was the chief investment officer at Aeltus Investment Management, where he led the equity investment staff. He was also lead portfolio manager on various mutual funds totaling $11 billion. Mr. Means has been in the investment industry since 1988.

Apis Capital Advisors, LLC, the second of ALPHX’s sub-advisers, manages a total of $46 million and utilizes a global long/short equity strategy. This strategy is designed to be plus or minus up to 30% net long and short international equity securities, emphasizing emerging trends and stock-specific opportunities in the international market. It also is not designed to take significant net exposures to any particular country, region, or currency. Prior to co-founding Apis, portfolio managers Daniel J. Barker and Steven A. Werber were managing directors at J & W Seligman and Company. Mr. Barker was the portfolio manager to the Seligman Emerging Markets Fund and also managed the Global Smaller Companies Fund. Prior to joining Seligman, he worked for General Electric Investments and has been in the investment industry since 1994. Steven Werber was also a portfolio manager with Seligman, and was an analyst for the Global Technology Fund. Prior to his position there, Mr. Werber worked for Fidelity Investments International and has been in the investment industry since 1992.

CapitalWorks Investment Partners, LLC manages $786 million and uses a convertible bond arbitrage strategy. The strategy is designed to be market neutral, and to take advantage of perceived discrepancies in the market prices of certain securities. This strategy typically utilizes long positions in convertible bond and short positions in common stock of the same company. Managing the portfolios of CapitalWorks are Brian Goodwin and John D. Wylie. Prior to joining the firm, Mr. Goodwin spent four years at Nicholas Applegate Capital Management, and also worked on the Chicago Mercantile Exchange as well as the Chicago Board Options Exchange. He has been in the investment industry since 1990.

Prior to co-founding CapitalWorks, John D. Wylie was president of Nicholas Applegate Mutual Funds and chief investment officer of Investor Services Group. He worked with Metropolitan Life Insurance Company prior to joining Nicholas Applegate, and has been in the investment industry since 1981.

ALPHX sub-adviser G2 Capital Management, LLC manages $25 million and utilizes a deep discount value long/short equity strategy, which is designed to be up to 30% of the net long common stock, preferred stock, and convertible securities of U.S. and foreign issuers. This strategy is typically constructed to yield a moderate beta while also seeking to dampen the effects of the industry, sector, market capitalization, and other potential bias exposures where possible. It also focuses on the fundamental valuations relative to the current market price of the company. Leonard J. Gross, the lead portfolio manager, managed two hedge funds for Garnet Group Hedge Funds prior to joining G2. He also worked in the Capital Markets group at Citibank as an analyst, and as the editor of an in-house arbitrage newsletter prior to his work with the Garnet Group. Mr. Gross has been in the investment industry since 1988.

Gabelli Asset Management, managing $28 billion, employs a merger arbitrage strategy, which is primarily designed to invest in announced merger and acquisition transactions by focusing on smaller cash deals with higher relative spreads. The strategy also seeks to allocate up to 30% to companies identified as trading at a significant discount to their intrinsic or private market value, as these companies may be attractive acquisition targets. Portfolio manager Mario Gabelli is the chairman, chief executive officer, and chief investment officer for Gabelli, and one of the preeminent figures of the investment management industry. He has been featured on prominent financial news TV shows and is frequently quoted and written about in industry publications. Mr. Gabelli founded Gabelli Asset Management Company in 1977 as a broker-dealer, and has since grown it into a diversified financial services corporation.

ALPHX sub-adviser Schultze Asset Management, LLC handles $370 million and uses a distressed securities strategy, which is designed to invest long and short in the debt, equity, or trade claims of companies in financial distress or involved in the bankruptcy reorganization process. Such securities typically trade at substantial discounts to par value, are highly non-correlated to traditional equity and fixed income indices, and may be attractive to investors when markets perceive a turnaround will materialize. George Schultze founded the firm in 1998, and is currently the lead portfolio manager. Prior to founding Schultze Asset Management, LLC he was a senior analyst at MD Sass and Company. Mr. Schultze is a graduate of Columbia University’s law and business schools, and has been investing in distressed securities since 1994.

Smith Breeden, managing $27 billion, employs a fixed-income arbitrage strategy, which is intended to be market neutral relative to popular fixed-income and equity indices. It is designed to take advantage of perceived market price imbalances between various sectors within the fixed-income securities markets. This strategy typically utilizes off-setting or hedged positions in various fixed-income and derivative securities. John B. Sprow and Jonathan M. Duensing manage the fixed income arbitrage strategy. John Sprow is a principal and senior portfolio manager, and has managed many short-duration, enhanced S & P 500, and leveraged strategies. Mr. Sprow has been in the investment industry since 1987. Jonathan Duensing is also a senior portfolio manager, focusing on corporate/credit related fixed-income securities, and has been in the investment industry since 1996.

The last of ALPHX’s sub-advisers is Zacks Investment Management (ZIM), which manages $450 million and utilizes an earnings revision long/short equity market neutral strategy. This strategy is designed to be market neutral, using long and short positions in common stock, preferred stock, and convertible securities of U.S. and foreign issuers. It also employs the Zacks Proprietary Research Model, which focuses on the patterns of analyst revisions-to-earnings estimates and seeks to identify trends that the market has not fully discounted in its current pricing of securities. The president and senior portfolio manager, Benjamin Zacks, oversees the investment process at ZIM. Prior to its founding, he was executive vice president of Zacks Investment Research and was responsible for product development and marketing. Mr. Zacks has been in the investment industry since 1978.