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THE HEDGE FUND LANDSCAPE ONE YEAR AFTER LTCM

It may be ironic but certainly not surprising to the readers of this newsletter that a year after the debacle of Long Term Capital Management, hedge fund investors are looking at their best performance, relative to the S&P, since 1993. After stabilizing earlier this year, the hedge fund market is currently going through an evolution marked by two major factors: rejuvenation and institutionalization.

It is noteworthy that a dozen alumni of Tiger Management now run hedge funds with assets that collectively exceed those of their alma mater. Traditional investment houses are also serving as training ground for hedge fund entrepreneurs. London has been particularly active and, interestingly, half of the $100 Million Club members in this issue are based there. Also, recently formed technology funds of various kinds, hedge, disguised longs, cross-over (mixing late stage private investments with public investments), are attracting capital from the technology entrepreneurs, the retail-oriented technology funds of funds and those investors sold on the concept that new blood is better able to invest in the information age economy. The rush to technology funds is reminiscent of the attraction developed by the emerging markets funds in the mid-90s and could take some of the late investors through the same painful, if temporary, disappointments. Few investors realize how significant hot issues have been to the performance of the newer, smaller technology hedge funds.

On the demand side, U.S. institutions are becoming a more significant driver in the hedge fund market. Their requirements are shaping the behavior of certain hedge fund managers, getting them to break away from a model overly dependent on one individual. Hedge fund managers are developing strategies to (i) extend the duration of their capital base, (ii) diversify their product lines by setting up new sector funds or private equity, venture and LBO funds and (iii) capitalize on the going concern value they have created through a variety of structures. Applying a P/E multiple to a hedge fund earnings is a scheme that is tempting many.

The institutional investor wants a product that offers certain characteristics of return, volatility and correlation that can improve the statistical make-up of their existing portfolios. In this context, maximizing performance can sometimes become secondary to risk control, predictability and asset growth. It would be a shame if, in satisfying this new demand, hedge fund managers lost their focus and creativity and abandoned the kind of conviction investing which has generally been at the foundation of the most successful track records.

Fortunately, the rejuvenation of the talent pool is giving investors a broader variety of choices and will hopefully make it easier for each investor to find the funds that are right for him. Stay abreast of the most interesting developments on hedge funds by logging on to www.hedgefundnews.com. u