Page 30

years and having a broad overview of the industry for the past 33 years. His insights are quite interesting.

Steinhardt finds it peculiar to talk about a "hedge fund industry." He sees hedge funds not as an industry but as part of the broader world of money management. He does not find a common investment strategy that binds these managers. During Steinhardt's heyday, hedge funds comprised a private elite club whose members provided superior performance over a long period of time. "We were looked at dubiously yet admiringly. Performance was special. . . . It was an elitist yet controversial area."

Steinhardt says the distinguishing characteristics were the manager investing his assets solely in his own fund, having a long track record, and being successful in a variety of economic climates. The manager was intense, intellectually superior, and motivated by performance—not growth of assets under management. The managers were also entrepreneurial; they lacked skill to build an organization.

Steinhardt reminisces about how he tried to institutionalize his firm but always backed out. He was on the verge of marketing a closed-end fund with Merrill Lynch—but he didn't go through with the deal. He also had received an offer from Dreyfus Corporation to buy part of his business. Rather than do that, he focused on what he had achieved—his performance record.

Today, Steinhardt notices a shift: Managers' objectives are different. He sees the industry attracting new people since the incentive fee makes it a very desirable alternative. Growth of assets and of fees is paramount to today's managers. Yet performance has become mediocre; there are many managers who are not so good. Investors may become less inclined to pay the fees as performance deteriorates. He also observes that the short part of the hedge has become a burden in buoyant stock market times.

Steinhardt has spent considerable time trying to understand the reasons for superior performance. He says that, among other things, it is an innate ability. For him it was the repetition and the continued testing of the process that created this innate sense. This was his edge. Because he was so focused on the stock market since his teen years, he was already a very experienced trader. His father gave him 100 shares each of Penn Dixie Cement and Columbia Gas System for his bar mitzvah. That became the spark motivating his interest. He graduated from the Wharton School of Finance and Commerce at 19 years old.