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Another interesting case is an endowment in-house trader turned hedge fund manager. Jonathan Jacobs, who had been at Harvard Management Company, left to start his own hedge fund in 1998. When that occurred, Harvard allocated Highfields Capital $500 million.

During the roaring bull market of the mid to late 1990s and the choppy market of 2000, an amazing proliferation of hedge funds—some good, some bad—has occurred, largely due to the incentive fee structure, as well as other factors discussed in the next section.

IMPETUS FOR STRONG GROWTH, 1994–2000.

Hedge fund growth has been strong due to the mystique and success of global macro managers over the years. Even when the likes of Julian Robertson and George Soros falter, it has been an impetus for key employees to spin off and form their own hedge funds. Noncorrelation to and diversification from traditional investments, attractive short- and long-term performance, expanding global markets, and fast-paced investment technology making information available on a timely basis have all contributed to the rapid growth of the hedge fund industry.

On the positive side, hedge funds have long had a mystique due to the long-term successful track records of some the global macro managers such as George Soros, Julian Robertson, and Michael Steinhardt. Their past performance has focused initial attention on the hedge fund industry. Their activity sparked other top managers from various walks of life to start hedge funds. When the performance of the top global macro managers started to falter, some key employees spun off from the large hedge fund managers to start their own hedge funds.

At the end of 1995 when Michael Steinhardt retired, a number of people who worked for him spun off and formed their own companies. Chuck Davidson formed Wexford Capital. John Lattanzio, who had been Steinhardt's head trader for 17 years, formed his own company. Ernest Werlin started Highview Capital. John Goodman found Concentric Capital. (See Table 2.1.)

In 1994, there was a large spurt in the growth of hedge funds due to the low short-term interest rate environment. This prompted investors to seek higher returns from more risky activities. The low cost of borrowed money made it easier for hedge funds to borrow cheaply, using