From uranium to barges, hedge funds covet all

"Generating alpha is becoming increasingly more difficult through the futures markets, as you have an influx of traders ... who are using similar trading strategies," says Amine Bouchentouf, President of Renaissance Investment Advisors, a New York-based financial advisory firm.

"You can generate alpha at a substantially more attractive level (from physical assets) because the barrier of entry is high. The returns are more interesting than the futures market," he added.

But investing in physical assets is not an option for all.

Sheer financial capability will make it a significant barrier for many of the smaller hedge funds, used only to handling tens of millions of dollars and running operations with barely a dozen employees.

"It's only an option for bigger funds," said one hedge fund manager, adding that hedge funds would need at least $300-$400 million to diversify into the physical world.

Investors in hedge funds must also be prepared to agree to minimum lock-in periods of up to five years in case of investments in physical assets, against a conventional time horizon of three months.

NOT WITHOUT RISKS

Industry insiders warn that investing in physical assets is no walkover. Hedge funds may be good in the virtual world of financial instruments, but the real world of physical assets can be tough, sometimes messy.

"As a physical trader you need resources to handle the actual stuff, which is not an easy game," said the hedge fund manager, who asked not to be named.

"It's risky. When you are dealing with physical commodities, you introduce a whole new layer of risk -- deliverability risk, volume risk...there is a whole new raft of risks that have to be measured and acted upon and hedged," said Vasey at UtiliPoint.