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EXECUTIVE SUMMARY

It is our view that the hedge fund industry is at a defining point in its evolution. After a few decades of modest growth, the hedge fund industry has experienced a dramatic acceleration in growth starting in 1990. It is estimated that hedge fund assets grew from under $20 billion in 1990 to over $170 billion in 1996. The number of funds also grew dramatically from under 500 to over 2500 in little more than five years.

The driving forces behind the growth of the hedge fund industry are increasing acceptance of these "alternative investments" and the increase in the base of "sophisticated" investors, especially high net worth private investors. The search for greater returns has led sophisticated investors to ever more exotic asset classes, including hedge funds. As hedge funds can go short, use leverage and take very concentrated positions, they can significantly enhance the performance. Various studies indicate that hedge funds as a group provide superior returns on average compared to the S&P 500 and demonstrate a low correlation with traditional investments like stocks and bonds. Higher and superior returns bode well with private investors who are always looking for "market beating" returns while willing to bear the higher risks associated with those higher returns. Institutions are attracted to hedge funds more because of their non-correlation characteristics. According to Modern Portfolio Theory, including hedge funds in a balanced portfolio consisting of stocks and bonds, can significantly improve overall portfolio returns while simultaneously lowering volatility.

The affluent private investors represent more than 80% of the hedge fund assets; the balance of almost 20% is made up of institutional investors including pension funds, endowments, foundations and insurance companies. In recent years there has been extraordinary growth in the affluent population in the US. Affluent households, those with investable assets of more than $1 million, control about $5 trillion of financial assets. This affluent segment of the population is growing at 14% annually while the population as a whole is growing at 1%. Strong asset growth is also projected for institutional investors. The financial assets available for investment are expected to grow from $10 trillion in 1996 to over $16 trillion by the year 2001.

Based on the analysis of the underlying forces, the outlook for the future growth of the hedge fund industry is very promising. We project an annual growth rate of about 26% to over $500 billion of assets by 2001 and a ten fold increase to over $1.7 trillion in ten years.

A study of the MAR/HEDGE database reveals that the top 15% of the population of funds control in excess of 80% of all assets under management. The industry appears to be concentrated at the top and very fragmented at the bottom. The hedge fund industry, as it exists today, features two strategic segments. At one end, there is a small group of very large "superfunds" and on the other end a large number of small niche players. The superfunds are an outgrowth of the original global macro players, generally having more than $5 billion of assets with extremely high minimums and long lock-up requirements. Most of these ultra-exclusive funds are closed to new investors. The majority of other hedge funds (more than 80%) are niche players and are run by one or a small group of individuals, each with their own investment strategy, market identity and support structure. These niche players have assets of less than $100 million with more than half of them having assets under $20 million.

The net result of these two extreme groups is that a void exists. There are no real market leaders with national or global reach and efficient customer and operations support available to the average sophisticated investor. The industry is looking for market leadership and we see a clear opportunity for a market leader to emerge and lead the industry into the next century. We believe that the present structure of the hedge fund industry will change from a fragmented one with thousands of small niche players into one made up of a small group of branded large organizations providing leadership in the global marketplace.