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While the fund of funds manager makes recommendations on the hiring and firing of managers, the final decision lies with the institution.

The institution's criteria for hiring include at least a two-to-three-year track record and the ability to redeem out of a fund in less than a year. And before investing, representatives will meet the manager and the key people. In their organization, seven people are involved in the process—two of them are located in the United States, and one is in the United Kingdom. By locating people overseas, the institution can gain easy access to managers and information. Most of the managers are based in the United States and Europe. Some of the managers receiving allocations include the superstar managers interviewed in the book.

The program did well in 1997, 1999, and 2000; 1998 was a down year for hedge funds in general and for this portfolio as well. The main benefit has been a smoothed portfolio and noncorrelation to Japanese exposure. The institution is very comfortable with this approach, and discussions are taking place to double the size.

Going forward, this Japanese institution would like to see more disclosure in general. In venture capital, it is used to so much information and would like to see the same with hedge funds. It would also like to know who the other investors are and see a more detailed portfolio. In general, the institution believes the fees are reasonable.

As one of the large users of hedge funds in Japan, this institution sees growing interest in Japan for this product not only from financial institutions but also from pensions and wealthy individuals. While the negative performance of 1998 hurt, general interest is increasing. In the future, this large Japanese institution may consider distributing hedge funds to retail Japanese markets.

EUROPEAN ACTIVITY

Recent reports indicate strong activity is taking place in Germany, especially among insurance companies. Many require a guarantee, but they are willing to lock up assets for as long as 10 years.9 Publicly held companies and pension plans are also active, while the banks are lagging.

Recent examples of Swiss institutions allocating to hedge funds are Nestlé's $4.1 billion Swiss pension fund. VEF, the Swiss Air pilots' pension fund, allocated $30 million in October 1999. Many of the large Swiss insurance companies have also started to allocate to hedge funds,