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light the great performance, both in terms of high returns and in many cases low volatility, particularly on the downside, that some of the managers generate.

Alluding to Long-Term Capital Management as an example, he highlights how the label "hedge fund" hurt other managers that were nothing like LTCM. "One manager sneezes and everyone catches a cold." He also emphasizes that one of the reasons UNC has many managers with smaller allocations is to prevent such single-manager disasters as well as to protect against the potential impact that fraud or other adverse situations can have on a portfolio with oversized positions.

At the Cusp of Something Momentous

Surprisingly perhaps, Yusko prefers longer lock-ups. The expectation is to hire a manager and develop a long-term working relationship, and a relationship takes time to build and judge. To have immediate liquidity and a short lock-up doesn't make sense; it is counterintuitive. He prefers to get lower fees in exchange for longer lock-ups.

Yusko is not a zealot for lower fees but he does believe in hurdle rates. A manager who does worse than the hurdle shouldn't get paid. One who does better than the hurdle should get a higher percentage so that the total compensation is equivalent to the standard 1 percent management and 20 percent incentive fee model with higher upside potential for truly superior performance.

Yusko feels the transparency issue has been overblown. If you can't fire a manager on a daily basis, why do you feel the need to see the data daily? It's a waste of time, concludes Yusko. "It's like letting your teenager take the car. If you don't trust him, don't give him the keys. But you don't have to go on every ride with him." For some managers, Yusko will look for monthly information, but generally it is quarterly data on performance, exposure, leverage, and principal trades.

Yusko feels that the hedge fund industry is at the cusp of something very momentous. A confluence of events—unprecedented valuations in traditional investments, unprecedented migration of managers out of traditional management firms into hedge funds, and institutions' desire to capture gains of a bull market without giving up upside potential—presents a huge opportunity for the hedge fund industry to become more institutionalized.