Michael Hennessy, co-founder and managing director of investments at $9 billion Morgan Creek Capital Management, likes to keep an eye on what the hedge fund managers he invests with drive. If one of them suddenly starts tooling around in a brand-new sports car, Hennessy begins to worry. “Red Ferrari syndrome,” as he calls it, implies that the manager might not be paying as much attention to Morgan Creek’s assets as he or she should be.
Anything suggesting inattention, in Hennessy’s view, can only be a bad thing, especially after a year in which there was so little good news for the hedge fund industry. The huge influx of cash into the sector before 2008 helped fuel record growth, and the biggest enablers of the boom were institutional investors who enthusiastically adopted what has come to be termed the endowment model of investing — a strategy best known for encouraging...