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merger arbitrage were those who were new to the game. She also prefers that a manager's assets do not grow too rapidly.

The most important element is the manager's quality and character. The manager should be bright, exceptionally motivated, not arrogant, and humble enough to respect the markets, as well as honest and trustworthy.

Rebalancing

Casscells says that in convertible arbitrage and merger arbitrage, Stanford adds to managers when the spreads are wide. "We think about it all the time. While we meet with managers quarterly, there is no formal rebalancing period."

Stanford has terminated only a few managers. In one case, a fixed income manager was directional, not an arbitrageur. In another case, a manager strayed from his stated mandate. And in another instance, the manager had trouble sticking with his strategy and flip-flopped so much that he missed a great opportunity.

Casscells says Stanford has been pleased overall with the hedge fund allocations. The year 1998 was challenging. In hindsight, they should have had less money allocated and added more later.

"You can make more money if you take a contrarian view and add money to managers after a decline," she says. "November 1998 was a great time to invest in fixed-income arbitrage. Even though it is psychologically hard to do, you should add assets when things look the darkest." Stanford did add to the fixed income allocation after 1998.

Casscells says that at that time, Stanford also started its exposure to convertible arbitrage. She notes how convertible arbitrage is a great example of providing a premium for an investor providing liquidity in an illiquid area. She observes how it doesn't have a natural home and seems to have problems every four years when liquidity dies.

Have the publicized blow-ups had any impact on the hedge fund allocation? "The blow-ups do cause us to reexamine the program and make sure we are satisfied with our due diligence and monitoring. We want to avoid situations like Long-Term Capital Management, which was not transparent, had its interests misaligned with investors', and strayed outside their core areas of expertise."