SEATTLE (MarketWatch) -- Separate accounts are one of the best-kept secrets in America. They're cheaper than hedge funds and offer higher, potentially safer returns than traditional mutual funds. It's worth the separate management fee.

Indeed, with all the attention to so-called hidden fees (in a world of full disclosure, nothing is hidden) along with expensive and unnecessary management fees, you'd think that costs were the only issue in investing decisions. That's blatantly wrong. Added investment value and increased portfolio safety are more important.

Investing experts talk about "alpha," which measures a money manager's results against a benchmark index. Alpha is added value. Separate accounts have added it and mutual funds have deducted it; in fact, separate accounts win hands down. Of 3,226 mutual funds the average alpha was -0.74, compared to 1,964 separate accounts which delivered a 0.70 alpha. With low-cost exchange-traded funds allowing investment advisers to offer creative and proactive portfolios of ETFs, separate accounts are even more attractive.

Separate accounts are accounts kept in the name of the investor and managed at the discretion of an investment adviser. An adviser is given a limited power of attorney to trade the account and deduct management fees.

The fees for investment management are usually less than 2% and the account can be either actively or passively managed. Some separate accounts are designed for institutions or pension plans, some offer only style-box portfolios; others are distributed to individuals by financial advisers while others are sold directly by registered investment advisers. Many separate accounts are available in taxable, tax-deferred (including within variable annuities) or tax-free (Roth IRAs or variable universal life).

Where do you find separately-managed accounts? One good source is Morningstar Principia Separate Accounts (you might ask your library to order it), or your financial adviser or discount stockbroker might be able to refer you to a manager whose goals fit your needs.

There are 567 retail separate accounts offered with less than $250,000 minimums, 387 with minimums of $100,000 and 93 with retail minimums under $50,000, according to Morningstar Inc. While some accept even smaller accounts, an acceptable separate account is not out of reach for most retirement investors and well worth researching.

Hedging strategies without hedge fund fees

Separate accounts over the past three bullish years have added about as much value (alpha) as the mutual funds have left on the table (negative alpha).

You owe it to yourself to investigate separate accounts. With a separately managed account, you can choose managers whose strategies are more proactive and fit your goals better than mutual funds.

Many independent registered investment advisers use proprietary or selective hedge fund strategies not available to individuals. Wouldn't you prefer a manager who objectively searches globally for opportunities and takes defensive action to protect your assets?

It seems the more you pay for load funds, the less management you get. Most mutual funds today are paying financial advisers a hefty up-front sales commission and offer little incentive to oversee your portfolio's performance. Fund loads can run 5% up front with additional costs for 12b-1 fees, plus higher management fees to compensate the fund company.

Mutual fund fees and loads are fully disclosed in the prospectus. Separate account fees are negotiable. Those fees depend on assets under management and are usually between 0.50% and 2%. Accounts over $1 million are typically negotiable, depending on the size of the account. Some firms also offer "friends and family" discounts to help a client reach break points for lower fees. (Some mutual fund companies will extend this privilege as well.)

The point is not to focus on the fees but the value added by more imaginative and less-rigid managers of separate accounts over traditional mutual funds. Alpha is a measure of value, not expense.