Small investors are getting new ways to invest like Wall Street bigwigs.

For a long time, the average investor has been shut out of one of the hottest sectors around: private money. This category, which covers everything from hedge funds to private-equity pools, usually takes a minimum investment of hundreds of thousands of dollars or more -- beyond the reach of most individuals.

Now a host of new products are giving small investors a way into the club. New mutual funds mimic the strategies of hedge funds and other private-investment pools, often with a minimum outlay of just a few thousand dollars. Other funds pool smaller investors' cash to buy directly into hedge funds and other private investments. Investors can also buy shares in publicly traded companies that act like private-equity firms, raising money from investors to acquire other companies.

The appeal of private-money investments is simple: They tend to zig when the broad stock market zags, reducing a portfolio's overall risk and potentially boosting returns. But small investors need to watch their step. Private-money products come with lots of complications and risks -- especially for investors used to the fairly straight-ahead world of stocks and bonds.

While private-money products can help diversify a portfolio, "you really need to know what you're getting into," says Ron Roge, a financial planner in Bohemia, N.Y.

Even defining private money can be tricky. Generally, the term refers to loosely regulated investments that aren't traded on an exchange. That can cover a broad range of vehicles that don't necessarily have much else in common.

The amount of money pouring into these investments is staggering. Hedge funds and private-equity firms now collectively control more than $2 trillion world-wide, compared with about $10 trillion held by mutual funds. Private-equity firms announce ever-bigger takeovers, and hedge funds dominate daily trading.

Yet performance, especially among hedge funds, has foundered in the past year. By many measures, hedge funds are trailing the major market gauges. One possible reason: All that cash coming in the door is making it harder to find money-making ideas that will move the performance needle.

Another caveat: Private money is opaque compared with conventional investments. Private-money vehicles generally don't trade on major exchanges, and they typically don't have to report performance regularly. Even when conventional mutual funds buy into private investments, it can be difficult to evaluate their track record.

Unloading these investments isn't always easy, either. Regular private-money vehicles are tough to trade, and some of the new products geared toward small investors can be just as illiquid. For instance, while regular mutual funds can typically be traded every day, funds that buy into private-equity funds usually require lengthy holding periods. Investors who try to get out early may lose a substantial chunk of their investment.

Then there's expense. Private-money investments often carry very high fees, and the new products that buy into private investments usually add steep fees of their own.

Beyond that, some private-money investments come with high risk built in -- which makes the new vehicles risky as well. Hedge-fund managers, for instance, have an unusual fee structure that gives them incentive to take big risks as they angle for giant returns. Typically, the managers reap 1 percent to 2 percent of assets, plus 20 percent or more of the fund's profits, if they meet certain targets.

The approach can lead to spectacular gains -- and failures. This summer, for instance, Amaranth Advisors saw huge bets in the natural-gas market go horribly wrong, leading to billions of dollars in losses. More than 1,000 hedge funds have closed in 2006, topping last year's previous record of 848 closures. (There are 8,000-plus hedge funds world-wide.)

Despite the catalog of risks, advisers say private money makes sense for small investors, as part of a well-diversified allocation to alternative investments. Many advisers recommend that investors devote as much as 20 percent of their portfolio to hedge funds, real estate, commodities, private equity and other alternative investments.

"We don't think of alternatives as alternatives, but as an essential part of a portfolio," says David R. Bailin, managing director and head of alternative investments at private bank U.S. Trust.

Some of the new products aimed at small investors mimic private investments instead of actually buying into them. For instance, a growing group of mutual funds uses hedging techniques in an attempt to profit whether the broader market rises or falls. This often involves combining long positions -- simply buying stocks with the hope the price will rise -- with short positions -- selling borrowed shares with the hope of buying them back later at a lower price.

Investment research firm Morningstar Inc. now tracks 44 such "long-short" mutual funds. Investors poured about $4.5 billion into hedge-like mutual funds this year through October, according to Financial Research Corp., up from $1.7 billion for all of 2005.

Unlike traditional hedge funds, hedge-like mutual funds are generally valued and traded daily and require minimum investments of just a few thousand dollars. Hedge-like mutual funds can also be less risky than hedge funds because they're heavily regulated. For example, they can devote only 15 percent of assets to "illiquid securities," or those that are thinly traded and hard to value.

But these mutual funds may charge hefty fees for employing complex strategies -- and they don't always deliver strong returns. The average hedge-like mutual fund charges annual expenses of 2.25 percent of assets, compared with 1.44 percent for the average U.S. diversified stock fund, and has lagged behind the Standard & Poor's 500-stock index over the past one and three years, according to Morningstar.

Funds of hedge funds are another way to get access to hedging strategies for a lower minimum. These funds, which invest directly in traditional hedge funds, held $499.6 billion at the end of September, according to Hedge Fund Research Inc., up 27 percent from the end of last year.

One benefit of the funds is diversification among a number of hedge-fund managers, financial advisers say. But some say the funds' fees are too high, thanks to the multiple layers of expenses: Funds of funds charge fees on top of the hefty expenses of the underlying hedge funds. And relative to broad market benchmarks, the funds of funds' performance has sagged along with hedge-fund returns. Funds of hedge funds gained about 8.2 percent this year through November, while the S&P 500 gained more than 14 percent, including dividends, according to Hedge Fund Research.

"The results are increasingly mediocre and certainly not worth the extra fees," says Jerry Miccolis, senior financial adviser at Brinton Eaton Wealth Advisors, who stopped recommending funds of hedge funds to clients last year.

Private-equity firms are also opening up to smaller investors. A number of newly launched vehicles, traded on stock exchanges, pursue the private-equity strategies that have traditionally been open only to very wealthy and professional investors. For instance, PowerShares Listed Private Equity Portfolio, an exchange-traded fund launched in October, holds companies whose main business is investing in or lending money to private companies.

Similarly, a growing group of publicly traded "special purpose acquisition companies" use the cash raised in their initial public offerings primarily to acquire private companies. This year through early December, 34 SPAC IPOs have raised about $2.6 billion, compared with 29 that raised $2 billion in 2005, according to data-tracker Dealogic.

SPACs launched in recent years have generally posted solid returns. The average SPAC IPO from 2005 has gained more than 13 percent, according to Dealogic. But since SPACs often acquire only one company, they don't offer much diversification.

Investors with a bit more cash might consider private-equity funds of funds, which pool money to make investments in private-equity firms like Carlyle Group or Blackstone Group. The funds, available from firms like Morgan Stanley and Lehman Brothers Holdings Inc., often require minimums of $100,000 to $1 million. Like funds of hedge funds, these vehicles carry layers of fees that can cut into returns. Meanwhile, advisers say, investors should be willing to hold on for at least 10 years, since turning around a business requires a lengthy time commitment.

Private-equity funds have raised record sums from investors this year, and some industry experts say the flood of cash is creating stiff competition for deals and could drag down returns. But in the 10 and 20 years ended June 30, private-equity returns outpaced major stock-market indexes by a wide margin, according to Thomson Financial and the National Venture Capital Association.