Page 42

tor funds. As a group, they were up 76 percent in 1999. Technology sector funds soared 102.9 percent in 1999.14 They are more nimble and can take advantage of more trading opportunities. They are often specialists in a particular arena. Investors—particularly institutions and those using the fund of funds approach—want transparency. They want to know how the manager's portfolios are constructed. Investors want to understand the style. Global macro managers tend not to be as transparent as other strategies. Investors also want to understand the risk management mechanism. Many of the global macro managers do not want to disclose this information.

Global macro strategies aren't working well in the present environment. Longer-term, when economic instability (e.g., an environment of unstable interest rates and currencies) reenters the marketplace, global macro opportunities will reappear. The environment, however, will be more challenging for the global macro manager.

IMPLICATIONS FOR THE HEDGE FUND INDUSTRY

The number of hedge funds starting and growing to a healthy size contrasts with the closure and problems of the largest hedge fund managers in 2000. In fact, the more problems these large managers have, the more spin-offs will occur from those very firms. This pattern is inherent in the system and will continue in the future.

As the number of spin-offs from the large managers continues, it is expected that many of the younger managers have learned the lessons of their mentors. The new generation understands the need to have succession, infrastructure, and institutionalization of the business. As a result, most of the new organizations are not centralized star structures, but instead are team-oriented. Teams are specialized, and senior portfolio managers are held accountable for their positions and at least partially rewarded based on their performances.

The spin-offs have seen their mentors get bombarded due to their unwieldy size. As a result, many are offering multiple funds that are smaller in size and often more specialized.

Parallels can be made with the mutual fund industry as well. Many mutual funds have adopted a team approach to fund management. Don Phillips, chief executive officer of Morningstar, observes that mutual funds are also moving toward specialization. "It is hard for a manager