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Institutions are now allocating to this new breed in record amounts. Recent studies show 104 endowments are allocating on average 2.3 percent of their overall portfolios to hedge funds, and each year those numbers grow. U.S. pension funds such as California Public Employees Retirement System (CalPERS), Public School Teachers' Pension and Retirement Fund of Chicago, and Oklahoma Firefighters' Retirement System are following the lead of the endowments. Institutions around the world are allocating to hedge funds—increasingly in Europe and Japan.

Investors—individual and institutional—can learn a great deal from this new breed. The key characteristics of these managers transcend age and generation as well as trading strategy. They love what they do, are motivated by the intellectual and emotional challenge, have the primary objective of delivering superior performance in various market conditions (not having the largest fund regarding assets under management), are the largest investors in their funds, and have a very large percentage of their own net worth in their funds. They have developed a culture consistent with their personalities. They are attempting to institutionalize the business. They have built an organization that consists of specialists and teams. While they have gone through difficult periods in the market, they learned from the experience. They have the ability to acknowledge and learn from their mistakes. Managing risk and volatility, as well as information technology are common threads.

Some characteristics are not universal but appear frequently. Most became involved with investing during their teen years. Most have Ivy League backgrounds and/or MBA degrees. Most take an opportunistic approach to the markets traded; fundamental research is the dominant approach. Most have seen their roles evolve into those of coordinator/overseer. Investment committees are a way to instill culture. Some selectively make allocations to other hedge fund managers. Minimum investments are significantly higher and lock-up of assets tends to be longer than with the typical fund. The superstar managers generally lead balanced lives—sports is a common free-time activity. Most of the organizations are located in New York.

On a number of characteristics, no agreement exists. Trading strategies differ. The amount of allocation to U.S. markets, global macro strategy, technology, and private equity varies. Little consensus exists on the degree of exposure to the stock market and the managers'