Hedge funds are looking for ways to lessen the tax burden that investors may throw on them, as the once stellar returns fade into the single digits. Barron's reports that investors may feel the tax pinch as they reap short-term capital gains from the funds' frequent trading, leaving them with a 35% tax rate to deal with. Some hedge funds, according to Barron's, are doing like San Francisco's Lattice Capital Management, which last April introduced a fund of hedge funds linked to a custom index, which allows the HF to offset taxes with gains in the portfolio. In another scenario, HFs are creating tax-exempt offerings, such as a municipal-bond arbitrage hedge fund. An increasingly popular tax-mitigating instrument is the tax-exempt life-insurance policy whose underlying asset is a hedge fund, offered by such firms as Tremont Capital Management. One warning about such policies, however: they come with high fees. Nevertheless, they're catching on, Barron's says, as the number of such life-insurance hedge funds has risen fourfold from 25 just two years ago to more than 100.