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And you thought the mutual-fund industry just wanted to sell mutual funds -- to as many people as it could. Why, then, did Vanguard Group attempt just the opposite recently, when it offered a fee-fattened private-equity fund to its wealthiest clients?

Vanguard is best known for its popular, low-cost mutual funds that replicate the performance of stock indexes. Founder John Bogle built the company on the premise that most investment pros can't beat the overall stock market -- so over the long term it makes sense to invest in funds mirroring the major benchmarks.

But last October, the nation's No. 2 mutual-fund company engaged Hamilton Lane Advisers to manage portfolios of private-equity funds offered through Vanguard's network of independent financial advisers. This was to be no ordinary mutual fund: Like hedge funds, private-equity funds typically charge both a management fee and keep a percentage of the profits generated. And now the Vanguard-Hamilton Lane Private Equity Fund has been quietly put on hold -- for lack of interest. "They misread the high-net-worth market in a big way," observes Dan Wiener, editor of the Independent Adviser, a newsletter that tracks Vanguard.

"Although we have had some success in obtaining commitments for the program, we believe it would have been difficult to raise an amount necessary to make the program cost-effective," Vanguard Chairman John Brennan was quoted saying in a press release. Vanguard added, bleakly, that "current conditions are very difficult for private equity programs, particularly those offered by new entrants."

Since the stock-market meltdown began in 2000, nearly every firm on the Street has tried to chase the so-called "mass affluent," offering tiered fees and more personal service. Vanguard clients with at least $250,000 in their accounts qualify for trade discounts and financial-planning services via Voyager Service, which provides discounts on trades and financial-planning services. Clients with accounts of $1 million or more have access to their own adviser through the Flagship Service. (Vanguard-Hamilton Lane Private Equity started with a $250,000 minimum, cut down from $500,000, and a ten year lock-up.)

"Vanguard knows their customers very well," Wiener adds. But this time, "they really blew it. Jack Brennan has been trying to put his stamp on Vanguard, and this was beyond their core competency." Nor was there much to glean from the offering documents about returns. Vanguard touted Hamilton Lane's access to big-name talent -- including Apollo, Carlyle, Thomas Lee, Thomas Weisel, Warburg Pincus, Weiss Peck & Greer -- as the big draw. But 1995-1998 returns on some of the funds ranged, for example, from losses of 2.1% to gains of 35.1% in one venture-only fund.

Vanguard's bailout echoes CIBC World Markets' alternative-investment fiasco, a closed-end fund-of-hedge fund, the Advantage Advisers Multi-Sector Fund I. It raised only about $80 million in a first-round public offering this past spring. Just to be eligible, Advantage Advisers investors must boast a net worth of $1.5 million or more, and then plunk down a minimum of $25,000 to pass go.

Beware mutual-fund companies selling "alternative investments" dressed up in mutual-fund clothing. They are often larded with fees. First, CIBC charges a 1.25%-management fee and 20% performance fee (the 20% applies to each of three underlying funds, so if one is up but the overall fund-of-funds is down, CIBC still gets an incentive fee on the gaining portfolio). A sales load of up to 5%, offering expenses of 24 basis points, plus one- year amortization of other offering expenses ($1 million) mean an investor will pay roughly 6.25% over the first year in sales load/offering costs. Add to that the 1.25% management fee, a shareholder servicing fee of 25 basis points (paid to brokers who hold for customers), and annual expenses estimated at 0.8%, and there's another 2.30%.

Whew! Just in the first year, an investor pays an 8.55%, plus an incentive fee. No wonder investors stayed away. Quipped one observer on why CIBC raised just $80 million: "Guess the lumpenproletariat high-net-worth investor is not so stupid."

Nevertheless, these crash-and-burns aren't stopping the rest of Wall Street from piling on. Charles Schwab plans to create a hedged equity fund under its Schwab Capital Trust series. The proposed Schwab Hedged Equity Fund is a long-short fund overseen by Geri Hom, who managed Charles Schwab's four MarketTrack all-in-one funds. Schwab's Hedged Equity Fund levies a 1.5% redemption fee and an even more onerous 1.75% management fee. The fund doesn't carry a distribution fee but includes a 1.55% fee for other expenses.

Not to be left out, banks such as Wells Fargo also are itching to sell hedge funds through public offerings, via investment vehicles registered with the Securities and Exchange Commission. The San Francisco bank formed an alternative-investments group last year and currently runs $30 million in two multi-manager hedge-fund strategies available through unregistered private partnerships.

Finally, whether dressed up as private equity or mutual fund-of-funds, are alternative investments fundamentally sound? Or are Wall Street's claims about their diversification and non-correlation benefits starting to sound hollow amid all the cash-register ringing? A recent study suggests investors have to plunge into "alternatives" in sizable amounts to benefit at all. For example, "hedge funds do not mix too well with equity," warn University of Reading academics Harry Kat and Gaurev Amin in a much-talked-about paper they updated in April. Unless investors pour in a substantial portion of their wealth, statistically hedge funds "will have little or no impact on the overall portfolio characteristics."

That's key, given that most institutional investors -- and many retail investors -- don't plan to allocate more than 1%-5% of their assets in alternatives.

Q&A in Health Care

Frank Sustersic, manager of the Turner Healthcare & Biotechnology Fund, sees plenty of cross-currents in health care right now. Sustersic, who runs not only a mutual fund but also a hedge fund for the Berwyn, Pa.-based Turner Investment Partners, says he's cautious on some of the big drug companies, which continue to face pressure from generics.

But he's more positive on some hospitals and health-maintenance organizations, which have been able to push through price increases to corporate clients. "Prices are going up in the mid-single digits, and that gives good visibility for earnings," he says. HMOs in particular are "pricing for profitability." Among his picks:

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