“In the fall of 2001, Sergio Horovitz got a tempting offer from his investment adviser at Bank of America Corp. here: switch from his boring fixed-income fund into a couple of hedge funds named ‘High Yield’ and ‘Daring’,” writes Geraldo Samor in today’s Wall Street Journal.

“Daring indeed. When an interest-rate bet made by fund managers turned out wrong nine months later, a 25% average loss at the funds cost Mr. Horovitz roughly 175,000 Brazilian reals, or more than $50,000 at today’s exchange rate. Now, he and other investors are contemplating legal action and Brazilian securities regulators have accused Bank of America of reckless management.”

“The episode highlights a major challenge in one of the world’s fastest growing, and most volatile, hedge-fund markets.”

“Hedge funds — which are lightly regulated, often high-risk investment pools aimed at the wealthy — have proliferated around the globe over the past few years as investors sought to boost the return on their portfolios while U.S. interest rates hovered at historic lows. In few places was the hedge-fund boom more marked than in Brazil — a hot market overall last year — where bankers displaced by mergers quickly set up shop and started managing money. Few countries have gone further in making the funds available to middle-class investors, rather than just the wealthy, raising questions about whether some savers are exposing their nest eggs to too much risk.”

” ‘I know it seems like that old investor excuse — “I didn’t know,” ‘ says Mr. Horovitz, a 41-year-old film-production company owner. ‘But it is true.’ “

“Bank of America, which has since sold its Brazilian asset-management business to HSBC Holdings PLC, declined to comment on specifics of his case, citing client confidentiality. A spokesman for the Charlotte, N.C., bank-holding company said 85% of the investors in the affected funds have accepted a voluntary offer of compensation from the bank and released it from liability. Mr. Horovitz has hired a lawyer and rejected the settlement offer that amounted to 35% to 40% of what he lost. The administrative proceedings by Brazilian securities regulators who accused Bank of America of making bets that were too risky for the funds are still pending.”

“Known here as ‘multimercados’ — or multimarkets — onshore hedge funds account for one-fourth of Brazil’s $150 billion investment-fund industry, according to Fortuna, an industry-tracking firm. Of 4,753 funds available to Brazilians as of April, 42% were hedge funds, compared with 35% two years ago, according to the Anbid, a trade group for the country’s investment banks. Arminio Fraga, the highly regarded former central bank governor, raised more than $600 million in a matter of weeks last year to set up his fund firm, Gavea Investimentos, which manages a local and an offshore hedge fund.”

” ‘While it took hedge funds 15 to 20 years to develop in the U.S., in Brazil that process happened over the past three years,’ says George Wachsmann, who oversees hedge-fund investments at União de Bancos Brasileiros, or Unibanco.”

“Regulators say they are sensitive to the need to protect less-affluent investors. Unlike in the U.S., where few hedge funds register with the Securities and Exchange Commission, all Brazilian hedge funds must disclose their holdings periodically and publish their asset value on a daily basis. Regulators are drafting tougher new rules that will require even more disclosure and cut down the categories of funds from more than 40 to around 10, a move that will help investors compare funds more easily.”

” ‘Most people don’t understand the difference in risk between one fund and another,’ says Carlos Sussekind, a director at Comissão de Valores Mobiliários, or CVM, the securities-industry regulator. ‘They go up to their branch manager, who says, “Look, this fund yields more than that one.” ‘ “