The New Dot-Coms; These days, aspiring billionaires start up hedge funds.

Byline: Rana Foroohar

Four years ago, dinner parties in fashionable corners of London and Manhattan were filled with former investment bankers who thought they could be the next big dot-com billionaire. These days the excited chatter is back, only this time everyone wants to be the next George Soros, who was the original hedge-fund billionaire before he set out to save the world. "Just do the math," says Anita Rosenberg, a partner at Harris Alternatives, a Chicago-based hedge-fund company with $5 billion under management. "One good year at a $200 million hedge fund can earn you as much as several years' work at Goldman Sachs."

Hedge funds have become more popular and more democratic. The best made strong returns despite the stock-market shocks since 2000 by doing what they are designed to do: hedge bets on stocks and other assets using a variety of strategies, like short selling and arbitrage. As a result, big institutions like pension funds have begun putting money in hedge funds, which previously catered to superrich individuals. At the same time, Europe is beginning to allow hedge funds to court the middle class; Germany, for example, introduced new rules at the beginning of the year which allow investors with only a few hundred euro to get into hedge funds.

The result is a flood of new money: hedge-fund holdings rose to $817 billion worldwide in 2003, up from $488 billion in 2000. As the total market booms, the average size of hedge funds is shrinking fast, now that every star and wanna-be-star investment banker is jumping into the game. According to Hedge Fund Research, an industry tracker, there were 6,297 hedge funds at the end of 2003, up from 3,873 in 2000. But if the dot-com boom offers any lesson, it's that quantity is the enemy of quality.

It's easier than ever to raise money for a hedge fund. "Guys with two years' experience and the right resume can raise $1 billion with no problem," says Rosenberg. The right credentials typically include a stint at a big investment bank. "Starting a hedge fund has become a lifestyle choice for anyone who's had a reasonable career in banking," says Simon Ruddick, managing director of Albourne Partners, a hedge-fund advisory firm in London. Existing funds are aggressively recruiting analysts to offer new investment options that hedge risk in ever more complicated ways. "These emerging managers might be unknown as individuals, but they have the aura of the existing fund ...