n the past decade the hedge fund universehas grown from a small number of

firmsmanaging several hundred million dollarsto 6,100 hedge funds that now
manage$355 billion.1If we add “traditional” alterna-tive investments, a category
including dis-tressed securities, leveraged buyout (LBO)funds and private equity,
the assets under man-agement for all alternative investments rise towell over $500
billion. Alternative investmentshave become an important
part of the portfo-lio of many investors, especially high net worthindividuals,
endowments, and foundations.2Despite this dramatic growth, hedgefunds remain
largely peripheral compared tomutual funds and institutional investmentmanagers.
Spectacular and well-publicizedlosses such as the $426 million loss by Man-hattan
Capital Management and the $3.6billion bailout of Long-Term Capital Man-agement
(LTCM) serve as a deterrent to manypotential investors, especially pension
fundsthat have fiduciary responsibilities. In recentyears some of the industry’s
most well-knownperformers, such as George Soros and JulianRobertson, have turned in
uneven and highlyvolatile results, with the latter choosing toexit the business.
Moreover, the lack of trans-parency and liquidity and the absence of reg-ulatory
oversight have contributed to a limitedrole for hedge funds in the past. Finally,
theabsence of commonly accepted hedge fundevaluation benchmarks, at least until
recently,has been an issue for many potential investors. Recent trends have led
observers to spec-ulate that the hedge fund universe is reachinga critical
consolidation and institutionalizationphase paralleling the mutual fund and
institu-tional fund manager consolidation in previousdecades. Traditional asset
managers (banks,mutual funds, venture capital firms, insurancecompanies and
institutional investment man-agers) have become more active in providingtheir
clients with alternative investment strate-gies. Other contributing factors are
increasedself-regulation of hedge funds, in the wake ofthe LTCM; growth in hedge
fund investmentsby endowments, foundations, and pensionplan sponsors; the
development of hedge fundperformance indexes and risk managementstrategies; the
proliferation of Internet sitesfor alternative investments; and the recent dra-
matic increase in the number of hedge fundsbeing organized. About 2,000 new
hedgefunds were created in 1999 alone, according toTremont Advisers, Inc., a hedge
fund con-sulting firm, raising the total number of hedgefunds to more than 6,000