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cations, things that aren't usually correlated may become so. We saw this in emerging markets. The spreads between Eastern Europe, Latin America, and Asia were all pushed out of whack.

The importance of the back office has become more critical. Investors need to find out the depth/liquidity of the back office and ask about the relationships that exist between each manager and their prime broker and accountant. In some of the trouble spots, prime brokers and accountants were the first to get early warning signals of potential trouble.

Depth of management team is studied more closely. There should be more than one brilliant key person. There should be a senior management team to provide checks and balances.

Investors are also taking an interest in finding out about the other investors. They don't need the names but need to know the degree of sophistication.

Investors are also more interested in managed accounts where they have transparency and liquidity. New products generating lower volatility with lower returns in the 9 to 13 percent range are gaining more interest from investors. Investors have a chance to select from different levels of risk. Long-only funds with futures overlay or hedged by short sales are being developed, as are more guaranteed products and insurance annuity products.

REGULATORY INITIATIVES

Regulatory initiatives followed the LTCM crisis in the United States. The President's Working Group, comprised of representatives from the Federal Reserve, Treasury, SEC, and CFTC, released a document in April 1999 that urged more disclosure of hedge fund leverage and risk through quarterly reports. It didn't recommend direct regulation but instead called for greater regulatory oversight of banks and registered derivatives dealers that lend to hedge funds.

The study said the SEC doesn't have direct jurisdiction over hedge funds but that the industry needs to develop its own standards. This led to the formation of the Group of 12.

The Group of 12's standards were released in June 1999. They advocated enhanced information sharing between counterparties or dealers and their trading clients. They also called for evaluation of leverage on