DETROIT - The outlook for alternative investments in 2007 is bullish, according to industry watchers, as increases in investor appetite and sophistication join substantial momentum to fuel the market for hedge funds and private-equity investments.

Even the looming threat of increased regulatory oversight, which overshadowed the hedge fund industry for much of last year, isn't enough to deflate the enthusiasm surrounding the alternative-investment industry.

The SEC's attempt to introduce some regulatory oversight of the hedge fund industry - which doesn't include private-equity investments - succeeded at least in raising investor awareness when it comes to due diligence, according to Lee Schultheis, founder and chief investment officer of Alternative Investment Partners LLC in White Plains, N.Y.

Mr. Schultheis, who manages two mutual funds that invest in hedge funds, doesn't think that the SEC is ready to abandon all attempts at increased regulatory oversight of alternatives.

"The SEC clearly wants to be under the tent of the hedge funds industry," he said. "Investors are saying they're comfortable with some level of oversight and third-party audits, and for now, I think the marketplace will dictate some independent controls."

The $1.3 trillion hedge fund industry continues to leverage its reputation for providing investors with returns that aren't correlated to the broad market indexes, according to Meredith Jones, managing director at Strategic Financial Solutions LLC in Reno, Nev.

"We're seeing the kinds of people at hedge fund conferences now that have never participated in this space before," she said.

During the first 11 months of 2006, the Hennessee Hedge Fund Index gained 10.06%, compared with a 14.21% gain for the Standard & Poor's 500 stock index.

The growing appetite for alternatives also is illustrated in the number of professionals sitting for exams sponsored by the fledgling Chartered Alternative Investment Analyst Association, based in Amherst, Mass.

Since the association's creation in 2003, the number of test takers more than doubled annually until last year, when it came close to doubling. There are about 800 CAIA certificants.

"Right now, there's a supply-and-demand mismatch where a lot of money is in need of expertise," said Craig Asche, the association's executive director.

"In terms of explosive growth, I think the next area will be the alternative-mutual-funds space," said Larry Eiben, chief operating officer at TFS Capital LLC, a Richmond, Va.-based firm that manages $100 million in two hedge funds and two mutual funds.

"We're looking at a huge ramp-up in alternatives, and I don't see any reason it will slow down," he added.