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Yusko sees the big issue for the industry as migrating toward being more solution-oriented rather than product-oriented. The days of "if you build it, they will come" are gone. Yusko feels the hedge fund industry needs to create products and services to meet institutions' desire for consistent returns, lower volatility, and lower correlation to traditional products. Managers must get to know clients and understand their needs. They should build products and services to fit those needs rather than just being a product vendor.

Yusko observes that some of the newer hedge fund managers are more client-oriented than the established firms. They hire client service people and operations managers early on and recognize that the true value in an organization is in the people and the relationships.

Yusko feels the industry is actually undercapitalized and expects a staggering amount of pension, endowment, and foundation assets eventually to enter.

CASE STUDY INTERVIEW: STANFORD UNIVERSITY

Stanford Management Company, which invests Stanford University's $8 billion endowment, began exploring alternative investment opportunities in the late 1980s. The goal was to achieve returns close to long-term equity returns, diversify the overall portfolio, and achieve a better reward/risk ratio. The endowment made its first distressed securities investment in 1990, and a few years later it made a risk arbitrage allocation.

Anne Casscells, chief investment officer at Stanford, says the two initial managers are still in the portfolio. In addition, the endowment has allocated to 16 others over the 10-year period. About 10 percent of the overall portfolio is allocated to hedge fund strategies; this allocation has been relatively stable over time. The goal is to make about 1 percent per month and to have standard deviation like bonds.

"The theme among our allocations is to invest in activities where you derive fundamental return for providing liquidity to the market, where you earn a premium for being invested in illiquid investments," says Casscells.

With this theme in mind, about 25 percent of the portfolio is allocated to market neutral strategies, another 30 percent to event arbitrage, 25 per-