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hance returns. Sussman's Paloma Partners concentrates on various market neutral strategies.

Sector funds focus on a specific sector such as technology, financial firms, or health care. Raj Rajaratnam's Galleon Group is an example that focuses on technology and health care.

Short sellers take a position that stock prices will go down. A hedge fund borrows stock and sells it, hoping to buy it back at a lower price.

BENCHMARKS

As institutions became more interested in hedge funds, the proliferation of benchmarks occurred. Institutions use benchmarks for judging the performance of their traditional managers, so it is only natural they would do the same for alternative investments.

Hedge fund managers, in most cases, however, perceive themselves as absolute managers rather than relative managers. For example, a manager might say, "My goal is to generate 12 to 15 percent returns each year." So independent of what the stock market is doing, this is the manager's performance goal. On the other hand, relative managers, such as mutual fund managers, compare themselves to different benchmarks.

The use of a benchmark, whichever one is used, has many inherent problems. First, it is not required that a hedge fund manager report performance numbers to any organization. Therefore, some of the largest managers—who might want to keep a low profile, or who are closed to investment—are not included in the calculated indexes. Thus, significant assets are not included in what is suppose to be a representational index. Second, most of the numbers submitted are unaudited and may be estimates. They may change down the road. There is no guarantee that the performance numbers submitted are correct. Third, some indexes may be based on gross performance numbers while others are based on net. Fourth, it is not uncommon for a manager undergoing difficult performance not to report the fund's numbers on a timely basis or at all. As a result, the benchmark may be overstating results. Survivor bias results since managers that go out of business or who are doing badly are no longer included. Finally, different degrees of leverage and different degrees of portfolio composition are used by the managers