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ful analogy to a painter applying many brush strokes. No one stroke is right or wrong; they are cumulatively painting a picture. He expects losses all the time because ideas are constantly being tested. He becomes concerned, however, when losses are larger than expected or predicted, or when risk levels are exceeded.

Griffin viewed losses in the same manner—loss is a central part of the firm's day-to-day experience. It is a process-driven firm where people learn by making mistakes. Kingdon says he thinks about being wrong before he invests.

RISK MANAGEMENT

Controlling the downside risk is foremost in these managers' minds. Kingdon and Kovner were two of the five large hedge fund managers who issued guidelines in February 2000 as a response to the President's Working Group in regard to Long-Term Capital Management's bailout.

Specific risk management tools include strategy diversification, maximum allocation per position, number of positions in the portfolio, and degree of leverage, as well as stress testing, reducing allocations quickly, and other factors.

Diversification

Diversification is a main way these managers manage risk. Multiple strategies are used by Griffin, Henry, Kovner, Och, Stark, and Sussman. The managers further diversify by geography. In Sussman's case, he uses a number of managers for each strategy to provide further diversification.

Maximum Allocation per Position/Sector

In order to ensure diversification, the managers often impose trade and sector maximum allocations. The maximum allocation of any position in Och's portfolio is 1 percent. For Kovner, no more than 2 percent of the fund's equity is risked on one idea. Stark's maximum allocation to a trade is 3 percent for convertible arbitrage and 2 percent for risk arbitrage. For Rajaratnam, a situation cannot have more than 5 percent of the portfolio, although a position can grow to 7 percent before it is