Page 309

20
WHERE THE HEDGE FUND INDUSTRY IS HEADED.

The hedge fund is at an exciting crossroads. The number of new funds being started and diversity of hedge fund managers' styles are at a peak. At the same time, institutional interest and allocations are at an all-time high.

The year 2000 served as an interesting litmus test of whom the top hedge fund managers are. With the Dow Jones Industrial Average, S&P 500, and Nasdaq dropping 5.6 percent, 9.4 percent, and 39.7 percent respectively, the true hedge fund managers showed their colors. Those managers that were not truly hedged or did not have adequate risk controls fell by the wayside.

In this watershed environment, changes need to be made for the hedge fund industry to continue to grow and prosper in the long term. These changes need to be made both from the manager as well as the investor point of view.

Cultures are different between the hedge fund community and the institutional community; an acknowledgement of that will go a long way in working out a mutually beneficial compromise. In some instances, most hedge funds managers' objectives are absolute return whereas institutions are used to relative performance and benchmarks. Another issue is that most hedge fund managers prefer using a fund structure to avoid regulation. Most institutions prefer separate accounts so they have more transparency.