I found this quote in the BusinessWeek cover story on Paulson & Co to be rather telling.
The author quoted an (unnamed) institutional investor who participates in hedge funds. He notes that “most hedge funds follow a familiar developmental pattern.”
Stage 1: Funds often improve quickly, but they’re also small and therefore difficult for large institutions to invest in.
Stage 2: When the fund’s managers are working hard and have shown some success; that’s when the upward curve is steepest, and the most astute investors get in.
Stage 3: Which the institutional investor called “cresting,” usually comes after the fund has become quite large and performance starts to drop off.
Stage 4: They are starting to buy baseball teams and those kinds of things. It’s not always the case, but we found that with those stages, performance is usually not as good as it was earlier.