THE only topic in town these days for anyone remotely interested in markets is the price of oil. Can it keep hitting records week after week? Will it really hit $100-plus a barrel? Or will it fall back, and if so where’s the new floor going to be? I’m in danger of becoming an oil bore so I’m not going to go on about it this week, except to say that in the medium term $100 a barrel seems a tad optimistic against the current $55. However, in the long term the supply-and-demand situation is such that it is inevitable, so we should all have some oil in our portfolios.

I usually suggest Shell and BP as the best ways in. They still offer value, so it doesn’t make much sense to invest in the tiny speculative oil companies and cash shells gushing up all over AIM at the moment: most of them will never get their hands on much in the way of oil or gas, or indeed ever make any money. Still, the market loves a bandwagon, so these facts aren’t putting off the get-rich-quick crowd: they are still happily buying. I dare say it will end in tears.

The same could, I think, be said for the market’s other big bandwagon at the moment: hedge funds. You can’t really call hedge funds an asset class. There’s no set definition for them. They all aim to make absolute positive returns every year, regardless of what happens in the wider market, but in terms of strategy that’s where the similarities end. They use a huge number of strategies involving complicated derivatives and computer programs to achieve that. And they buy shares such as Allied Domecq, which they think will go up.

There is one area where hedge funds are virtually identical, however: their fee structure. They all charge a management fee of at least 1% of your capital every year plus a performance fee of 20% of any profits they make.

Say you set up as a hedge- fund manager and get $500m (£265m) to manage. If you make a 10% return you’ll get $10m (20% of $50m) plus your fee of $5m, making a nice total of $15m. And even if you make nothing for your investors you’ll still get your $5m. Keep going for a couple of years and you’ll be in clover: as money pours into the sector, extraordinary wealth is being created for the men running the money (according to UBS, hedge funds took $45 billion in fees on total assets of $1,000 billion last year).

Run your eye down the list of donors to any of our big institutions these days — from art galleries to charities — and if you know the names to look for you will see much of the big money comes from the hedge-fund industry. I am told of one group, set up a mere 18 months ago, that agreed at the time to give one third of their profits to charity. So far they’ve given £75m. That’s nice. But it also means that they’ve kept £150m. There are 11 people in the group.

I wonder if they really des-erved that money. I suspect not. The average return from a hedge fund last year as measured by the CSFB/Tremont index was less than 10%. So far this year it is only 1% and that is optimistic: the indexes tracking hedge funds tend to overstate returns, so for 2004 think more like 8%, or a maximum of 5.4% after the fees.

Given the fact that most hedge funds don’t really do that well, wouldn’t it be better if they didn’t take a performance fee until they had at least made you as much as you would get from a savings account? They could charge you nothing (except the annual management fee) up to the prevailing rate of interest plus, say, 1% and their 20% on anything extra. At least then they would be paid only when they made excess returns.

I’m very keen on hedge funds and the search for absolute returns in theory (just as I’m keen on investing in oil in theory) but in practice the fees make many of them a pretty iffy investment. Before you choose one take a quick look at the absolute returns you can get on a good savings account these days (about 5.5%) and think about which might offer the better value. If we’re talking about something like the RAB Special Situations fund (which is up 63.49% in the past 12 months) it’s the hedge fund, but if we’re talking about many of the others, it is the savings account.