Page 3

choices of hedging technique. Different criteria exist on which trades are selected. Number of investors and geographic breakdown vary. The amount and frequency of information given to the investor vary considerably, as does the number of people in the firm.

Three major challenges exist for the hedge fund manager: determining when the optimal asset size has been reached; surviving challenging markets; and developing organizations that can last from generation to generation.

The natural tendency is for a manager to let the fund grow as large as possible. The larger the fund, the more fees the manager collects. Yet as a fund gets to a certain size, which varies depending on the number and type of strategies used, performance starts to deteriorate. Another problem is that managers may not be able to get out of a wrong idea quickly. Furthermore, areas of core competency sometimes are not adequate for growing funds, motivating the manager to stray into new areas that may not be related to the manager's specialty. This may necessitate hiring subportfolio managers.

Another major challenge for the hedge fund is its ability to survive in difficult markets. The bull market in stocks helped many managers post excellent returns. Now that the markets are choppier and more difficult, risk management and hedging play a larger role. The short side of the equation becomes more important.

Except for Cumberland Associates, no elite hedge fund management firm has yet been successful in creating continuity from one generation to another. It remains to be seen whether the superstar managers will be able to succeed at this. A number have made attempts through creating specialist teams, developing a culture, and emphasizing the importance of career development. Many of the 60-something hedge fund managers had started their hedge fund careers after a successful investment career and did not consider succession or exit value in their initial business plans.

MAP

There are four sections of the book. Part One looks at the past. These chapters highlight what has happened and what has changed. Chapter 1 explores the historic watershed events of the year 2000—the retirement of Julian Robertson of Tiger Management and George Soros's reorgani-