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Transparency is an area that needs work. Hedge funds use trading programs and strategies that are very different from the traditional long-only investments to which most institutions are accustomed. Risks differ for the various hedge fund strategies. As a result, it is difficult to summarize the risks of a pool of hedge fund managers in a comprehensive manner. Transparency would go a long way to resolving this issue for institutions. Furthermore, institutions that are experienced in venture capital are used to receiving investment details and would like to see the same practice with hedge funds. Institutions are interested in knowing what other investors are involved—or at least the types of other investors.

Institutions are becoming more knowledgeable and experienced in hedge funds. Many feel comfortable enough to focus on strategies outside of market neutral or to delegate assets to a strategy other than fund of funds. Some are allocating to new managers or non-U.S. managers. Many are focusing on specific strategies. Institutions are not concerned that fees are too high but generally prefer hurdle rates. This is a feature they will continue to push for.

Some institutions are requesting that managers understand their needs and customize innovative product to meet their needs rather than just sell them ready-made product. The institutions want consistent returns, lower volatility, and lower correlation to traditional investments. Along these lines, managers need to be more client-oriented. Investor relations appears to be an area that many hedge funds have not placed emphasis on.

Manager capacity and size will continue to be an unresolved issue as the top managers grow even more as institutional assets flow in. Managers need to be cautious as they grow; they need to continually measure and quantify the impact of increased size on performance. Their top priority should be delivering superior performance through various market conditions—not being the largest hedge fund in order to collect the most fees.

Investors need to continue their strong due diligence efforts to avoid the blow-ups and problems that have occurred. One main issue is determining when a manager has reached his or her capacity. Too many assets could hurt a manager's performance. And if the institution does allocate to a mega-manager, it needs to find out who actually is managing its assets—is it the main portfolio manager or a subportfolio manager? The experience of each needs to be considered. And if it is the