The move underlines the trend in the finance industry of banks and traditional fund managers exploring the hedge fund business to boost fee income and stem the "brain drain'' as traders jump ship for lucrative rewards at the funds.

``The reason behind the decision to offer hedge funds was to play the skills of teams within the company. It's a way to keep good people,'' said Gary Vaughan-Smith, head of alternative investments at ABN AMRO.

``It also diversifies our business and gives us a different client base ... For hedge funds, that's basically fund of hedge funds and family offices [high net worth investors].''

ABN AMRO already runs a hedge fund with around US$100 million (HK$780 million) in assets covering emerging market debt, and another that trades currencies, with US$700 million. In January 2003, ABN AMRO's hedge funds were managing just US$250 million.

Plans for new hedge fund strategies include long-short equity, where managers can buy stocks and short sell, in Europe, Britain, Japan and Australia, said Vaughan-Smith. ``We're also looking at long-short credit.''

Analysts say another motive for banks and traditional fund managers offering hedge fund products is higher fees. Hedge funds normally charge 1-2 percent annual management fees and up to 20 percent of any outperformance of preset targets, while some traditional long-only funds can sometimes barely muster half a percentage point.

Funds of hedge funds, which invest in a variety of hedge funds, are also able to charge more - 1-2 percent management fees and, sometimes, performance fees of 5-10 percent.

ABN AMRO has three funds of hedge funds, managing US$1.3 billion, up from around US$550 million in January 2003. It plans to expand this product range, too, over coming years.

``Fund-of-hedge-fund investors include high net worth individuals, institutions, pension funds and insurance firms,'' said Vaughan-Smith.

Strong demand from institutions like pension funds looking for capital preservation, real returns and diversification has helped double the money in hedge funds to around US$1 trillion worldwide since 2000.

Flows this year appear to have slowed, but analysts expect assets under management in the industry to grow by 10-15 percent this year, from around 15 percent last year.

Many institutions are barred from investing directly in hedge funds because they use derivatives, leverage and short selling, which makes them riskier investments.

Instead, they use funds of hedge funds, which carry out due diligence enquiries and monitor the business and investment risks.