These alternatives, comprising no more than, say, ten or 15 percent of the investor's portfolio, tend to be more volatile than mutual funds. Fees can be high, and tracking the performance of these alternatives is more difficult than tracking public mutual funds. But alternatives can serve as hedge against declining stock and bond markets, offer potentially higher returns, and reduce capital-gains taxes.

Here are a few alternatives you may want to consider.

Managed accounts. Also known as wrap accounts or separate accounts, these private accounts a managed by money managers specifically for individual investors. Services generally include personalized security selection, buy and sell strategies, tax planning and customized performance reporting. Although separate accounts can be composed of mutual funds, an alternate approach would be a collection of individual stocks, bonds, or even more esoteric investments such as commodities.

One advantage of these privately managed accounts is that they can allow the investor to focus on, a handful of stocks or other securities, rather than the dozens or even hundreds a single mutual fund may hold. This minimizes "overdiversification" and gives the investor a chance for greater profits (or greater losses). Investors also can time the purchase and sale of securities in order to better manage their tax situation.

Minimum investments for separate accounts commonly run $100,000, though some advisors feel investors should not get into these accounts unless they have at least $250,000. Fees can run anywhere from one percent to three percent.

Direct real estate. The argument for directly owning an office or apartment building, raw land, rental property, or similar investment in real estate rather than through real estate Investment trusts (REITs) or REIT mutual funds is that individual ownership of real estate performs differently Direct real estate is less likely to track the stock market than do REITs or REIT mutual funds, and thus can serve as a diversification tool.

Limited partnerships. After a decade of disastrous returns following the 1986 tax act, partnerships today are based much more on economics than tax write-offs. The same principle applies co limited partnerships as owning direct real estate: shares in an oil and gas well in Texas, for example, behave differently than shares in Exxon.

Private equity funds. These funds, typically put together by brokerage firms or banks, buy into privately owned companies or may provide venture capital. You'll commonly need to invest a minimum of $1 million, and you shouldn't put more than 20 percent of your total investment money in a fund like this. These funds, as are many forms of alternative investments, are considered illiquid. You may be required to leave your investment in for at least ten years. Private equity funds don't consistently beat mutual funds in total return, though some have returned 100 percent in a year. Rather, they may provide a buffer should the public stock market decline.

Venture capital. An alternative to private equity funds is to invest directly in local start-up companies or small growth companies. As with so many alternative investments, the investment can be exhilarating and rewarding, but decidedly risky.

Hedge funds. Most of these funds are designed to protect or enhance stock market gains through the use of derivatives, buying long and short, financial futures and other techniques. Investment minimums tend to be high—$ 500,000 to $1 million-though investors can get in for less through

February - 30- 1998