Last week’s question and answer

Incorporated in 1977, I’ve been through tough times and good times. Customers tend to fall in love with my products. At my core is innovation and good design. Peel off my plastic outer layers and you’ll find portable digital music players, personal computers, laptops and more. My operating system marks the spot. “i” have sold tens of millions of my key products. I recently launched some “mini-stores,” to promote my unique wares. My annual revenues top $8 billion. My name stems from my co-founder’s time on a farm in the Northwest. Who am I?

(Answer: Apple)

Hedging bets

While the word “hedge” conjures up images of investors cautiously hedging their bets, hedge funds are often extra-risky, volatile investment vehicles that demand huge upfront investments, sometimes in the millions.

Despite this, hedge funds have more than quadrupled their assets since 1999, managing close to $1 trillion today. By contrast, U.S. mutual funds hold some $7.4 trillion. There are more than 8,000 mutual funds in existence and some 7,000 hedge funds, it’s estimated.

Like mutual funds, hedge funds comprise the pooled money of multiple investors, which is then invested by a professional money manager. However, unlike mutual funds, hedge funds are not regulated by the Securities and Exchange Commission, are not permitted to advertise, and their managers don’t have to be registered investment advisers. In addition, they’re not open to just any investor; only “accredited investors” — folks earning upward of $200,000 per year or those worth more than a million smackers — need apply.

Since hedge fund managers are relatively unfettered by restrictions, they can and do take many more risks than ordinary investors or mutual fund managers. They frequently short stocks, buy on margin (in other words, using borrowed money), invest aggressively in options and futures, and make currency bets. Interestingly, these are generally strategies that Fools avoid and mutual fund managers aren’t permitted to use. Because of their frequent trading, hedge funds also can rack up considerable amounts in taxable capital gains.

In the right hands, hedge funds can work. Billionaire philanthropist George Soros’ Quantum Fund, for example, reportedly returned an average of 33 percent per year during some three decades. But Soros is not average. And with more and more hedge funds opening for business, the quality of their average returns is likely to suffer.

Some hedge funds do deliver. But those most assured of doing well in them are their managers, who frequently take around 20 percent of all fund profits for themselves, on top of charging investors 1 percent to 2 percent per year in fees. Learn more at www.sec.gov/answers/hedge.htm.

Reverse mortgages revisited

You recently presented a negative view of reverse mortgages. Isn’t there a positive view? — M.Q., Panama City, Fla.

There is. Darryl Hicks of the (not unbiased) National Reverse Mortgage Lenders Assn. wrote to us, saying: “You state that the proceeds from a reverse mortgage can be received as a lump sum or regular payments. What you failed to mention is that the most popular option chosen by seniors is to receive funds from a reverse mortgage as a line of credit that they can draw on whenever the need arises.”

He also pointed out that reverse mortgage interest rates are competitive with regular mortgages, and that the home equity loans we suggested aren’t perfect, either: “While a home equity loan may be less costly to obtain, compared to a reverse mortgage, the homeowner still is obligated to make a monthly payment.” A reverse mortgage “enables a senior to convert part of the equity in his or her home into tax-free income without having to sell the home, give up title or taking on a new monthly mortgage payment.” Learn more at www.reversemortgage.org, or (866) 264-4466.

Where online can I find information on colleges and financial aid? — E.F., Fort Pierce, Fla.

The U.S. Department of Education offers a wealth of information on government student aid programs. Read its excellent handbook at: http://studentaid.ed.gov/students/publications/student_guide/index.html. The Financial Aid Information Page, at www.finaid.org, has the scoop on everything from scholarships to alerts on popular financial aid swindles. At www.fastweb.com, you can search a scholarship database. For general information on colleges, try www.collegeboard.org, www.petersons.com and www.campustours.com. Also check out www.fool.com/college and “The Motley Fool’s Guide to Paying for School” (Motley Fool, $12.50) by Robert Brokamp.

Bully for bulls

At the urging of my broker, I bought stock in a company dealing in bull sperm. My co-workers laughed. I bought at $4 per share and watched it rise to $64 per share on a Friday. I sold half at $32 and hoped for more growth on Monday. But someone sold late on Friday, and the stock fell. I sold on Monday at $14. Even so, I made a nice profit and vacationed in Florida. — Gregory Miller, Trenton, N.J.

The Fool Responds: If all this activity was happening within two trading days, and you knew little about the company, its competitive position and recent developments, you were speculating, not investing. “Penny stocks,” which tend to trade below $5 per share, are notoriously volatile and easily manipulated. Manipulation may explain how your shares surged and plunged so far in such a short time. You’re lucky to have gotten out with a profit — many people lose their shirts investing in penny stocks.

Phil hangs up his Nikes

This week, Nike (NYSE: NKE) Chairman and CEO Philip Knight turns over his clipboard and whistle to William Perez, most recently the president and CEO of privately-held S.C. Johnson, a company many investors wish were public. With Knight’s legend securely cemented in the annals of business history and Nike’s stock near an all-time high, the decision seems well-timed.

The outgoing boss’s story starts with Knight and partner Bill Bowerman developing shoes for runners that Knight peddled from the trunk of his car at track meets, and ends with one of the most powerful brands in the world. Knight was a masterful businessman who revolutionized how to sell sports apparel and equipment.

S.C. Johnson is one of the best consumer products companies, boasting brands such as Pledge, Saran, Ziploc, Drano, Windex, Off! and Raid. It has a very disciplined product development process, coming up with innovative and useful products.

It’s nice to know that Perez rose through the ranks at S.C. Johnson. He knows sales, marketing, brand management and operations, and has the experience of putting it all together to lead a company. Time will tell whether Perez is successful or not, but it looks like a good match. Perez shares the same enthusiasm for sports (he is a marathon runner), knows how to drive people to buy goods, and knows how to lead a creative, competitive culture. What more could Nike shareholders ask for?