Money Management Q&As

Hedge funds? Check the shrubbery

Q. I want to invest in a hedge fund to protect against a slump in the stock market. What are the possible drawbacks?

A. Hedge funds generally use leveraging and other speculative methods that could cost you big if they don't work out. Such funds may invest in highly illiquid securities whose value is hard to determine, and managers may be tempted to exaggerate it. Keep in mind, too, that hedge funds are less subject to regulatory control and disclosure requirements than ordinary mutual funds.

Starting in February 2006, certain hedge fund managers will have to register with the SEC as investment advisers, so you may want to pick one of their funds. Check the SEC's Investment Adviser Public Disclosure site ( http://www.adviserinfo.sec.gov) for information on registered investment adviser firms including some of their key personnel.

Keeping an estate plan from going askew

Q. My will leaves our son the maximum amount covered by the estate-tax credit. If I die this year, he'd receive $1.5 million and my wife would get $2 million. But the exclusion will go up to $2 million in 2006 and $3.5 million in 2009. If I live long enough, our son could end up with the lion's share of my estate, which isn't what any of us wants. Would there be a tax problem if he takes less?

A. Not if your son formally disclaims a portion of his inheritance within nine months of your death and your will specifies that whatever he gives up goes to your wife. The disclaimed amount will be eligible for the marital deduction, so your wife will get it tax-free. When the time comes, an estate planner can advise your heirs on the most advantageous way to make the split.

Is a Roth IRA safe from creditors?

Q. I'm thinking about converting a traditional IRA to a Roth account this year. Will it be safe from creditors' judgments?

A. Probably. Some state laws that protect IRAs from creditors don't specifically shield Roth accounts, but the federal bankruptcy act signed into law in April covers all IRAs up to $1 million (adjustable for inflation). The effective date of this provision was Oct. 17, 2005.

Your credit may depend on who's keeping score

Q. I took advantage of a new federal law to obtain free credit reports from the three nationwide credit bureaus that issue them. All three reports contained the same information. Each service offered to sell me a copy of the credit score a lender might obtain if I applied for a loan. Would I need to buy only one, since all three should be identical, or do the bureaus calculate their scores differently?

A. Unfortunately, no, because each bureau bases its scoring models on slightly different factors. Therefore, you'd need scores from all three bureaus to be sure of getting an advance look at what the lender will see. Furthermore, the longer the period between the dates you and your lender order copies, the more likely your score will change. Even a couple of weeks can make a difference, so you may want to time your order accordingly.

Go by stock charts or stick to fundamentals?

Q. I get a market newsletter that often refers to support and resistance levels when it recommends buying or selling a particular stock. How significant are they?