Like retired money manager William Berger (see story, p. 103), Nicolas Berggruen is a successful investor and an avid art collector-Berggruen's passion is works by the American pop artist Andy Warhol. But unlike Berger, Berggruen puts investing and collecting in two separate boxes.

"I have never bought a piece of art thinking that it will appreciate in value," the publicity-shy Berggruen says when we visit him in his Park Avenue office in Manhattan. "It may appreciate," he continues, "but that is never my motive. Collecting should be guided by your eye, your tastes. It's an intellectual pursuit."

Berggruen, 37, has collecting in his blood. His father, Heinz Berggruen, was an art dealer, investor and friend of Picasso's. Today he is among the world's leading modern art collectors. Berggruen-owned art is on permanent display at New York's Metropolitan Museum of Art, London's National Gallery and the Centre Georges Pompidou in Paris. Most of Heinz Berggruen's collection is on loan to the Berlin museum, in a separate building across from the Charlottenburg Palace.

The younger Berggruen's firm, New York-based Alpha Investment Management, got its start in 1988 running money for the Berggruen family and that of his South American partner, Julio Mario Santo Domingo Jr. (The elder Santo Domingo is a member of FORBES GLOBAL's Billionaires list, July 6, 1998.) Alpha creates and manages portfolios for wealthy individuals (minimum investment:$1 million) and institutional investors ($10 million) that want to buy hedge funds but don't want to do the selecting themselves.

Alpha's custom-tailored "funds of funds" are not cheap. They charge their shareholders 1.5% to 2% of assets annually (less for larger accounts). And that fee is in addition to the fees that the underlying funds charge. Depending on the account, Alpha may also charge a 5% to 10% incentive fee above a hurdle rate.

"It's true that you pay twice," Berggruen acknowledges, "but we think we offer a true service. The hedge fund world is extremely complex today. There are thousands of managers. We've been following them for 11 years." Alpha's research team is headed by Lynn Weber, a former hedge fund auditor at Arthur Andersen. Weber and her staff of four analysts keep tabs on all of the funds that Alpha has money with-and prospective managers-with frequent office visits, questionnaires and portfolio analysis.

Whereas many funds of funds charge exorbitant fees for mediocre performance (see "Where's the performance?" Mar. 8), Berggruen's record is impressive. After expenses, Alpha's Strategic Fund has returned about the same as the S&P 500 over the past five years but with much less risk. The fund's Sharpe ratio-a measure of returns relative to volatility-was three times better than the S&P 500's and almost five times better than the Morgan Stanley World Index's in the past five years.

"We haven't done as well as the most aggressive stock funds have," says Berggruen, "but we are not taking the same kind of risk as a portfolio that is only equities, only long." In late summer 1998, when the U.S. market slipped 15%, Berggruen's investors lost just 4%.

Berggruen says only 40% of the Strategic Fund's portfolio is invested in equity hedge funds. Another 40% is spread among managers that buy (and sell short) currencies, commodities, bonds and just about everything else. Around 20% is placed with arbitrage funds.

He won't say which hedge funds he's buying but does offer a few guidelines.

Rule No. 1: Diversify, diversify, diversify. "We've been nervous investors for quite awhile," he explains. "There's no question that most Western markets are extremely highly valued. Now, more than ever, you need to diversify away from the stock market."

Rule No. 2: Always go both long and short. Back in the 1950s, when A.W. Jones developed the classic hedge fund concept, "hedge" meant that a manager limited risk by playing both sides of the market. But now few fund managers hedge their bets in this way. Berggruen looks for those that do. He will place money only with managers who have excellent records with short sales.

Another rule: Watch that leverage. Berggruen: "Some managers can use leverage to their advantage. But we don't want to invest with people whose entire strategy depends on leverage." That kept Berggruen away from the Long-Term Capital Management mess.

Stick with managers who have their own money on the line. The more the better. Berggruen: "We have our own money alongside our clients'. We expect managers we invest with to do the same."

When it comes to art, Berggruen's clients are on their own. While money management is a game of diversification, art collecting is just the opposite: "Unless you're running a museum, you have to invest your resources-intellectual and financial-in a way that is very focused. Focus on a few ideas and focus deeply on them."

Berggruen is collecting mostly Warhol, but he also likes Jean-Michel Basquiat, Francesco Clemente and Anselm Kiefer. "I'd love to collect Picasso," he sighs, "but I could never compete against my father."