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were positive. During this brutal August 1998 period, many investors asked why hedge fund performance was not more spectacular.7

Time frame must be considered. While one can construct a portfolio not correlated to the stock and bond market for one month like August 1998 or April 2000, most portfolios are constructed to provide diversification for a minimum of three years. In other words, it is not smart to look at one month only to see if noncorrelation in fact exists; a longer period should be used.

PERFORMANCE

Performance for most strategies has generally been good in the short term and long term. Looking at 1994 through 1999, most hedge fund strategies have generated double-digit returns in four out of the six years. These are: event driven, market neutral, global macro, global established, and fund of funds. Global established funds' returns have been in the 20 to 30 percent range.

Looking at the short term, 2000, we also see excellent performance.8 Short sellers, market neutral, event-driven, and fund of funds all had returns between 10 and 18 percent. No style category was down for the year.

FROM A. W. JONES–STYLE MODEL TO OTHER STYLES

Alfred Winslow Jones, a former sociologist and journalist for Fortune magazine, is credited with starting the first hedge fund in 1949. The company was called A. W. Jones & Co. He conceived the idea of hedging stocks by going long and short. When this idea worked correctly, the shorts did worse than the market when the market was going down and the longs did better than the market when stocks went up. His goal was to eliminate market risk by hedging long equity positions with short positions that gain in value when stock prices fall. With market risk virtually eliminated, the fund and the manager's destiny were determined by stock selection.

He combined leverage and short sales to hedge against market declines. His fund was driven by long and short stock selection, not market timing or inefficiencies. He did not invest in bonds, commodities, cur-