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to switch gears from a long mind-set to a short mind-set." Phillips observes how mutual funds have become more narrowly focused in the past few years. So instead of being all things to all people, a mutual fund may be packaged as growth and value. Two separate managers—not one—trade a fund; each is a specialist.

The closing/reorganizing of some of the large macro traders indicates the era of big positions on macroeconomic trends has probably come to a close temporarily. And with big hedge funds closing up, there will be more opportunities.

Portfolio allocations to technology, quantitative skills and information technology, will continue to increase in importance in a hedge fund manager's life—for stock selection and information harnessing.

CHALLENGES

A few critical challenges exist for the hedge fund community. Only one large hedge fund management firm has been successful in creating continuity from one generation to another—there have been three successions for Cumberland Associates. It remains to be seen whether the superstar managers will succeed at this. A number have made attempts through 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.

A second issue for the hedge fund industry is the ability to survive in more challenging markets. When looking at the hedge fund industry overall—not the small elite group interviewed in the book—it is fair to say that some of the younger managers have not experienced various market cycles due to their short track records, and they have been faced with a relatively benign stock market. Depending on how it is measured, the bull stock market had been roaring for 5, 18, or 26 years. During the roaring bull market of the 1990s, the short part of the hedge became a burden.

A third challenge is for a manager to know when the fund has reached its capacity. At a certain asset size, performance starts to deteriorate. The larger a fund grows, the more motivation the manager may have to expand into areas outside the person's core competency. The