Mutual fund complexes branching into hedge funds to woo new customers are facing scrutiny from regulators who fear that traditional mutual fund investors could be harmed as the two different types of funds are offered under one roof, lawyers told Reuters Monday.

"Managers receive better compensation for hedge fund products than mutual fund products, and that creates a conflict on where you send the trades," said Kenneth Gerstein, a partner at law firm Schulte Roth & Zabel. That could entice a manager of both a hedge fund and a mutual fund to work harder for his or her hedge fund clients, fund managers and lawyers said.

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