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July 31, 2000

Cover Story: The Secret World of Hedge Funds: Forget about George Soros and Tiger Management. Hed

By Sanford Wexler & John A. Byrne

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  • Cover Story: The Secret World of Hedge Funds: Forget about George Soros and Tiger Management. Hed
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The world of hedge funds is secretive and sometimes shadowy. But the image of the freewheeling hedge fund gunslinger is more the stuff of fiction than reality.

"I have always believed in the long-term," said Todd Harrison, partner and head trader at Cramer, Berkowitz & Co., a New York-based hedge fund with $350 million in assets under management. "I don't want to hurt the people I trade with [on the sellside]. I call them all through the day telling them what I'm seeing and doing. That's a mutually beneficial arrangement."

Trading for a hedge fund is a mostly conservative profession and ranks high among the career aspirations of trading pros. Market neutral strategies, short selling, leverage. These are the flesh and blood of many funds.

Hedge funds, unregulated pools of capital for rich people and institutions operated as limited partnerships, allow traders to dabble in a panoply of instruments - from stocks and bonds to currencies and commodities.

Hedge funds give managers and top traders a strong incentive to grow profitably. They often have a sizable portion of their own wealth invested in the funds they run.

Gunslingers, hedge fund traders definitely are not.

Hedge funds are growing in popularity, propelled by an increase in the number of rich Americans. The price tag: One million dollars in investable assets or an annual income of at least $200,000 over three consecutive years. An estimated 2.5 million Americans qualify.

The prize money is attractive: Hedge funds have a record of big double-digit risk adjusted returns (An average of 37 percent through the 1990s.) The chances of an investment failing are often neutralized, or 'hedged,' by offsetting transactions. In theory, that means foolproof.

But as Wall Street has learned from painful memory, the industry is littered with spectacular failures.

The industry was shaken by the liquidation of all six hedge funds run by Tiger Management, as well as the big losses of George Soros' Quantum Funds earlier this year. Their enormous size and contrarion style of investing contributed to the image of the hedge fund as an untamed

beast. Mahathir Mohamed, prime minister of Malaysia, blamed hedge funds for the collapse of Asian currencies two years ago. Soros' big bets pummeled the British pound in 1992.

There is a controversial side to the smaller funds as well. Some critics say these have a reputation for trading ahead of big mutual or pension fund orders, on information the smaller funds receive about the big funds' positions.

Whatever the full truth, the more than 6,000 hedge funds worldwide are performing comfortably and showing renewed signs of vitality. The CFSB/Tremont hedge fund index posted a 3.7 percent return in June. That pushed the alternative investment benchmark to 1.8 percent year-to-date, positive territory for the first time since April's market shivers.

"You won't read about the number of funds coming into existence," said Steve McMenamin, a fundraiser for Indian Harbor Associates, operator of several hedge funds in tony Greenwich, Conn. "You won't read about the ones that make a lot of money."