Individual investors are getting more options for investing in hedge funds. That’s basically good news as long as they proceed with caution.

In the 10 years ended Dec. 31, 2008, Hedge Fund Research's Fund Weighted Composite Index gained 7% per year, on average. The Standard & Poor's 500-stock index showed a 13% cumulative loss for that period. Yet 2008 was not a good year for most investment vehicles. A record-setting 1,471 hedge funds closed in 2008, and 858 shut their doors in the first three quarters of 2009. Total assets shrank by more than $300 billion, to $1.5 trillion, according to HFR.

Still many institutional investors have bounced back in because hedge funds show superior performance and can reduce risk. And, hedge funds in general, reported superior returns in 2009. Recently, the number of products that offer individual investors ways to invest in hedge funds have increased, especially in exchange-traded funds (ETFs).

The IQ Hedge Multi-Strategy SMA seeks to track, before fees and expenses, the performance of the IQ Hedge Multi-Strategy SMA Index. The Index attempts to replicate the risk-adjusted return characteristics of the collective hedge funds using multiple hedge fund investment styles, including long/short equity, global macro, market neutral, event-driven, fixed income arbitrage, and emerging markets. IndexIQ does not invest directly in hedge funds. Instead, it seeks to replicate the performance of the hedge fund strategies by investing in selected Exchange-Trade Funds (ETFs).

Recently IndexIQ, said that the City of New Haven Employee Retirement Fund has invested $8 million in the firm’s multi-strategy hedge fund replication separately managed account (SMA) vehicle. The IQ Hedge Multi-Strategy SMA is designed to be liquid, transparent and low cost. This allocation represents the first time the City of New Haven’s Employee Retirement Fund has invested in a hedge fund-like strategy.

“By using ETFs to replicate hedge fund performance, we can provide investors with increased liquidity and full transparency at a considerably lower cost than traditional hedge funds,” said Adam Patti, chief executive officer at IndexIQ. “At the same time, the investor avoids fund manager-specific risk, a key concern in the post-Madoff world.”