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Glory days

Pequot founder Art Samberg managed one of the world's biggest hedge funds before a split with his partner reduced his firm by half.

In March 2000 hedge fund manager Arthur Samberg was on top of the world -- literally. To celebrate his 59th birthday, the chairman of Westport, Connecticut­based Pequot Capital Management climbed Mount Kilimanjaro, the tallest freestanding peak on earth. Fresh off a year when two of his funds were up more than 100 percent, Samberg was running one of the biggest hedge fund firms in the world, with roughly $15 billion under management.

But there were clouds in that heady atmosphere. Samberg and Daniel Benton, president of Pequot, had begun discussing where to take their firm. Should they continue managing mostly growth-oriented long-short equity funds or branch out into new strategies? Benton, who had been delivering 60 percent annualized returns running the Pequot Technology Fund, thought they could grow the firm to $30 billion or $40 billion. He and Samberg hired executive search firm Heidrick & Struggles to find a CEO to steer Pequot through its next growth phase so they could focus their time on what they did best -- investing.

But on a tennis court one Saturday the following September, their ambitious plans were abruptly shelved when Samberg became faint and felt tightness in his chest while playing doubles with friends. After a quick breather he wanted to continue, but one friend, who moonlighted as an emergency medical technician in nearby Chappaqua, New York, knew better and insisted on driving Samberg to Northern Westchester Hospital.

It wasn't a moment too soon. Diagnosed with a congenital defect in his aorta, Samberg was transferred to Westchester County Medical Center in Valhalla, New York, where he underwent emergency surgery. Though he was released from the hospital in a few days, it took about six months before he returned to work full time. When he did, his perspective and plans for Pequot had changed radically.

"It was stunning to go through it, to realize you survived the worst heart vascular disease you can have," recalls the 6-foot-3 Samberg, still a fierce competitor on the tennis and basketball courts. "I didn't know what I wanted to do."

Before Samberg got sick, he and Benton were on the same page -- two very driven guys who got along well despite an 18-year difference in age, looking to grow their business. But everything had changed.

Although Samberg was interviewing CEO candidates at his home in Westchester by November 2000, he had doubts about bringing in an outsider to the firm he co-founded. "I wanted to figure out what was right for me before I brought in a high-powered CEO," he says.

By putting the decision on hold, Samberg sealed Pequot's fate. Benton was not content to wait, says Samberg, and the pair decided to split the firm between them. In September 2001 they officially went their separate ways, each taking roughly $7.5 billion in assets. Samberg kept the Pequot name, while Benton created a new firm, Andor Capital Management.

"We never got a chance to figure this thing out," Samberg says with an apparent tinge of regret.

Now, a little more than four years after his much-remarked breakup with Benton, Samberg is embarking on that heady expansion plan after all. In 2005, Pequot added eight funds, boosting its total to 15, including new offerings devoted to strategies such as market neutral and short credit that Samberg admits go well beyond his own experience. The firm also recently launched the Emerging Managers Fund, a joint venture with Merrill Lynch & Co. aimed at identifying up-and-coming hedge fund managers.

To carry out his plans, Samberg has increased the number of investment professionals at Pequot from 59 to 97 during the past year and lifted the total roster of employees from 183 to 260. By mid-2006, Samberg hopes to have more than 110 professionals.

"He is trying to do what nobody else has done before -- build a hedge fund organization and infrastructure around a central platform that someday can survive him," explains John Myers, president and CEO of Stamford, Connecticut­based GE Asset Management, a longtime Pequot investor. "He is bringing in unique talent, even in areas he doesn't have expertise in."

To help execute this ambitious strategy, Samberg lured 20-year Morgan Stanley veteran Byron Wien to Pequot in December 2005. As chief investment strategist, Wien will work closely with Samberg to develop the firm's global macro investment strategy (see box). Wien joins a senior management team that includes vice chairman Peter Dartley, 59, who heads business development; Michael Corasaniti, 40, the former director of research at New York­based investment bank Keefe, Bruyette & Woods, who oversees Pequot's core global research; and Michael Takata, 47, who arrived in 2004 from Ulysses Partners and helps manage the core global fund.

As the firm grows into a bigger, more process-driven organization, Pequot is looking to Wien to help preserve the team-oriented, informal atmosphere. "I want a broad-based alternative-investment firm held together by deep research and a collaborative culture," says Samberg.

Wien's hiring was part of the master plan hatched by Samberg that also included the recruiting last June of Wall Street veteran John Mack as chairman. Mack and Samberg have been close since 1992, when Wien introduced them because Mack, then a senior Morgan Stanley executive, was looking for a place to invest his personal money. In 2004, Samberg provided his pal with an office in New York after Mack left his position as CEO of Credit Suisse First Boston following a disagreement with his bosses at parent Credit Suisse Group in Zurich over the firm's strategic direction.

Mack's stint at Pequot lasted less than a month. He left in July to run Morgan Stanley after a shareholder revolt led to the departure of CEO Philip Purcell. Mack's brief stay has fueled speculation that Pequot is being dressed up for sale. Skeptics question whether Samberg, 64, and Wien, 72, have the hunger and drive to successfully mount their ambitious expansion plan. "This is a young person's game," says one hedge fund industry veteran.

Samberg has a lot riding on his plan. Five years ago his name would have been near the top of many investors' lists of the world's greatest managers. Over the past dozen years, his flagship fund, Pequot Partners, has an average annualized return of 16.5 percent, compared with 10.5 percent for the Standard & Poor's 500 index. Since 2000, however, the fund has failed to match its long-term average despite beating the S&P four out of six years. Although Pequot loyalists, like GEAM's Myers, still include Samberg among the hedge fund elite, his return to the pantheon depends heavily on the success of his firm's expansion.

LIKE MANY SUCCESSFUL HEDGE FUND MANAGERS, Samberg, who was born in the South Bronx, a few blocks from Yankee Stadium, grew up modestly. At the age of eight, he moved with his parents and brother to Tenafly, New Jersey. His father, an electrician, never attended college, and his mother stayed home to care for the children before going to work as a secretary.

Samberg says his father, who graduated from high school the same year as the 1929 stock market crash, would have been an electrical engineer had he gone to college. "That's why I went to MIT," says Samberg, who studied aeronautics as an undergraduate at the Massachusetts Institute of Technology. "My father was a very smart man who never got a chance in life."

After graduating from MIT in 1962, Samberg went to work for Lockheed Missile and Space Co. in Sunnyvale, California. While there, he attended Stanford University part-time, earning a master's degree in aeronautics. Samberg, who pursued his technical studies largely at the urging of his father, was not happy. He enjoyed reading books and magazines about business and while at Stanford would often stop by local brokerage offices to check stock prices.

In 1965, Samberg quit Lockheed to enroll at Columbia Business School. He and his wife, Rebecca, a Detroit native, moved to New York, where Samberg made two lifelong friends who would also make it big in finance: Mario Gabelli of Gabelli Funds and Leon Cooperman of hedge fund Omega Advisors. The three commuted together from the Riverdale section of the Bronx to Columbia's campus on the Upper West Side of Manhattan.

After graduating with an MBA in finance in 1967, Samberg joined Kidder, Peabody & Co. as an electronics analyst. In 1970 he jumped to fledgling investment boutique Weiss, Peck & Greer, where he was the firm's first hire. Wien became a friend after the firm where he worked -- Brokaw, Schaenen, Clancy & Co. -- merged with Weiss Peck in 1974.

Samberg left in 1985 to join friend and former Weiss Peck colleague Jonathan Dawson, who was running his own investment firm in Southport, Connecticut. In 1986, Samberg and Dawson launched Pequot Partners as a growth-oriented hedge fund with an emphasis on technology. Based in New York, it was the forerunner of the fund Samberg runs today.

Samberg suffered his first major setback on October 19, 1987, when the Dow Jones industrial average fell 22.6 percent, the biggest single-day market drop in history. Pequot Partners had just $22 million in assets at the time, half of which came from George Soros' Quantum Fund. On the evening of the crash, Soros told Samberg he was withdrawing his money. Forced to liquidate a big chunk of its holdings to meet the redemption, Pequot plunged 44 percent in the fourth quarter to finish the year down 27 percent.

Samberg calls the experience humiliating and says his biggest mistake was not shorting properly. He considered closing the fund and getting a more stable job working for someone else. After all, his oldest son was a senior at Princeton University, his daughter was attending Cornell University, and another son was in high school.

Instead, he set out to rebuild his fund -- and his reputation. Pequot had shrunk to $5 million, mostly from friends, and Samberg stopped accepting new money. He decided never to let his short exposure fall below 40 percent of assets, providing Pequot with downside protection in case of another big market drop.

Working off this small asset base, Samberg was up more than 20 percent in 1988 and more than 70 percent in 1989, the year he and Dawson renamed their firm Dawson-Samberg Capital Management. By 1992, Pequot had grown to $100 million in assets.

In 1993, Samberg and Dawson hired Benton, a 34-year-old Goldman, Sachs & Co. PC analyst and five-time Institutional Investor All-America Research Team first teamer, creating a new fund for him to manage: Pequot Technology. The timing was ideal. Tech stocks were on the verge of taking off.

"We were the first sector hedge fund," says Dawson, who managed the firm's long-only portfolios.

From 1995 to 1999, Benton racked up an average annualized return of 54 percent at Pequot Technology. Samberg's Pequot Partners generated avarage annual returns of 36 percent during that period, while Pequot Scout -- the firm's small-cap fund, run by Mark Broach -- was up 33 percent a year on average. Samberg launched Pequot Healthcare Fund in 1998, and the following year it returned an astounding 157.1 percent, fueled in large part by the biotech and human genome craze.

By the end of 1998, the firm's assets had grown to $4.5 billion, but Samberg was becoming uneasy. His hedge funds -- which accounted for about three quarters of Pequot's assets -- charged a 1 percent management fee and 20 percent performance fee. Dawson's long-only fund charged a straight management fee. Samberg's top lieutenants, like Benton, were generating much of the firm's profits and wanted their share of the spoils. "My young guys were becoming impossible to keep," says Samberg.

At the end of 1998, Dawson and Samberg dissolved their partnership, and Samberg reopened his firm on January 1, 1999, as Pequot Capital Management, with $3.5 billion in assets. It was an amicable split, both men say; Samberg was more interested than Dawson in creating a much bigger enterprise.

After the split Benton became president of Pequot and continued to deliver impressive returns. Pequot Technology was up 102.3 percent in 1999, riding the wave of the Internet mania. "You can ride waves, but nobody rode them as well as Dan," says Dawson.

Even more remarkable was Benton's 34.4 percent gain in 2000, the year the tech bubble burst. "Dan is absolutely brilliant," says Dawson. "He had no down quarters at Pequot."

In 2001, Samberg went through his second split in three years when Benton left Pequot to start Andor. The separation was friendly, says Samberg. He calls their time together "a shared success story," taking credit for hiring the people and creating the culture that enabled Benton to thrive. (Benton, as well as his attorney, Kevin O'Brien, failed to return numerous phone calls seeking his version of the events leading up to the breakup.)

After leaving Pequot, Benton initially prospered, thanks to substantial short positions in tech stocks. In 2002 the Andor Diversified Growth fund was up 31.4 percent, and Andor's assets topped $10 billion, making it for a brief time the world's biggest hedge fund firm. Pequot Partners, meanwhile, was down 13.5 percent in 2002, as Samberg was overly optimistic that equity markets would bounce back following a two-year slide.

During the next two years, Benton and Samberg experienced a reversal of fortunes. Pequot Partners rose 13 percent and 10.1 percent in 2003 and 2004, respectively, helped by a recovery in global stock markets, while many of Andor's funds lost money as Benton stayed bearish for too long.

SAMBERG'S BOLD GROWTH PLANS ARE NOT without risk. Even hedge fund legends like Soros and Tiger Management's Julian Robertson Jr. stumbled when they ventured beyond their core competencies. Samberg thinks he can avoid similar missteps by launching a series of single-strategy and sector funds off one research platform to provide investors with a shelfful of investment choices. "We hire people for the same existing platform," he says. "We want a very robust, deep, fundamental platform."

Pequot's expansion began slowly. In 2002, Samberg launched Pequot Special Opportunities Fund, run by Rob Webster and Paul Mellinger out of Pequot's offices in Los Angeles. The two look for deeply discounted securities of companies in distressed situations. Webster had previously headed the special situations group at Los Angeles­based private equity shop Pacific Capital Group; Mellinger was a member of his team.

The Special Opportunities Fund is part of what Samberg calls Pequot Capital's "life cycle" strategy, whereby the firm invests in companies during various stages of their development. His firm's venture capital arm, Pequot Ventures, has committed $1.7 billion in capital to start-up and early-stage companies since 1997. Pequot's long-short hedge funds invest in companies during their growth stage. The Special Opportunities Fund steps in when companies struggle.

Pequot managers and analysts echo a common refrain: The research platform is the glue that binds everything together at the firm and makes Samberg's expansion strategy seem sensible. Although each fund has its own dedicated research team, they all share information, either informally or formally, through a single firmwide database. The database tracks visits with companies and includes the analysts' research and recommendations and the number of shares owned by each fund that has made an investment in the companies' stock.

"The platform is about culture, professionalism and personal and corporate growth," explains vice chairman Dartley, who joined Dawson-Samberg in 1994 as the firm's sole trader. This is Dartley's second tour of duty. In 2002 he left the firm and moved to Hawaii, where he enjoyed swimming and surfing. "I was physically and emotionally burned out," he says. Samberg coaxed Dartley out of the water and back to Pequot in 2004.

Dartley handles product development and oversees the firm's 18 traders. One of his main responsibilities is to help find new investment professionals to implement Pequot's growing menu of strategies. He will also help the firm, which has offices in Connecticut, New York and California, expand to Europe and Southeast Asia.

Samberg aggressively accelerated his expansion program in 2005. Among the eight funds launched last year is the low-volatility Market Neutral Financial Services Fund, which tries to maintain zero net market exposure by being equally long and short. Samberg says he doesn't want any of his funds to grow so large that their size hampers their performance. He anticipates eventually offering 20 to 30 different strategies, which could be combined to create distinct multistrategy funds.

Last year Pequot rolled out its first multistrategy product, a low-volatility fund built around six core strategies. In November, Samberg hired three former Citadel Investment Group portfolio managers -- Peter Labon, Carson Levit and Steve Pigott -- in part to develop a multistrategy fund focusing on relative-value and arbitrage opportunities.

One of Samberg's most ambitious programs is Pequot Emerging Managers Fund, the joint venture he launched with Merrill Lynch in July 2005. If successful, it could serve as a model for further growth and for developing future talent. Samberg plans to hire ten to 20 "emerging managers." He says that typically they will be young -- 27 to 35 years old -- former "superstar" analysts, proprietary traders and long-only managers. Each will be given about $20 million to manage, funded by $500 million in proprietary capital put up by Merrill Lynch. The managers will be paid a salary and get a piece of the incentive fee. Presumably, if some prove to be very successful, separate funds could be created for them.

Although Samberg gets very excited discussing the potential for the new single-strategy and multistrategy funds, the reality is that the bulk of his firm's $7 billion in assets is concentrated in its core global funds. They include flagship Pequot Partners and related funds Pequot International and Pequot Endowment, which Samberg runs with help from managing directors Corasaniti and Takata; Pequot Scout, which is managed by Broach; and Pequot Healthcare, a life sciences fund run by Dr. Faraz Naqvi, who trained at Harvard Medical School and was recruited from Dresdner RCM Global Investors in 2001. Although Pequot Healthcare has a 29.5 percent average annualized return since its inception, that number is skewed by the fund's triple-digit gain in 1999. The real star at Pequot may be Scout, which has an average annualized return of 20.1 percent since 1994 -- and has never had a down year.

Samberg's strategy is based on the premise that different investors demand different products. That's why he is multiplying funds in a manner reminiscent of mutual fund companies during the 1980s and 1990s. And although Dartley insists he is careful not to overload Pequot's investment or operational systems, he also says the firm can handle many more investment teams.

"It's not very complicated what Art is doing," says his friend Gabelli. "He is taking a portfolio of businesses that is no different than what I did," pointing to his own array of open-end mutual funds, closed-end funds, hedge funds and managed accounts. "Art can attract a lot of smart people," he explains. "Talent migrates to an organization like Pequot."

Part of the logic behind launching so many funds is that they serve as a recruiting and retention tool. "It is my strong belief that in order to keep people, you must give them the chance to run something," says Samberg. Even now he gives portfolio managers the power to hire their own analysts, meet with clients and split their piece of the performance fee with their staff as they see fit. He says he is also willing to give his top performers "a big chunk" of the profits and has no intention of trying to "nickel and dime" them. "I made a lot of money in the '90s," he says. "I have my own capital in the funds, so I will make it back."

Glenn Dubin, co-founder of $8 billion-in-assets, New York­based hedge fund Highbridge Capital Management, agrees that Samberg must provide more than just money to make it worthwhile for managers to stay. "To attract world-class portfolio managers, he has to offer added value beyond raising assets for them," says Dubin. "You have to give them a significant part of the profits."

At Highbridge, Dubin and partner Henry Swieca have taken a very different tack from Samberg. They built up their 14-year-old firm around a core multistrategy fund and then later spun off single-strategy funds. In September 2004, Dubin and Swieca sold a majority interest in Highbridge to J.P. Morgan Chase & Co. for a reported $1.3 billion, and some onlookers are wondering whether Samberg is expanding Pequot with the same goal in mind.

ONE OF THE BIGGEST CHALLENGES every hedge fund manager eventually must face is to find a way to preserve the aspects of a firm's culture that led to its early success. And, like most hedge fund firms, the culture at Pequot is a reflection of its founder's personality.

Old friends Cooperman and Gabelli say success and wealth have not changed the amiable Samberg. "There is no sense of arrogance or elitism," says Cooperman. "He's a genuinely nice guy," adds Russell Carson, a founding partner of private equity firm Welsh, Carson, Anderson & Stowe and another high-powered pal from Samberg's Columbia days. "What you see is what you get. There are no hidden agendas."

Samberg concedes that getting the culture right has been extraordinarily tough. He has run his firm informally since the Dawson-Samberg days of the late 1980s. It's not unusual for employees to take time out during the day to go outside to play touch football or to throw a Frisbee. Or they might go to the firm's gym to work out or play basketball, a passion of Samberg's, who is known for battling aggressively under the basket. "He's tough," says GEAM's Myers, who recalls playing some memorable two-on-two and three-on-three games at Pequot when he showed up for meetings. "He's too competitive to lose."

Broach, who was Dawson-Samberg's 12th employee, recalls that on his first day in 1994 the entire firm went outside during lunchtime to play basketball at a park near the office. To Broach, this sent an important message: "We're not worried about the next trade or stock."

Samberg regularly hosts holiday parties. Last year's annual Halloween party was attended by 93 kids, mostly children of employees. Wizard of Oz Samberg performed a skit telling the story of Dorothy, then handed out dollar bills to each child. "Art always likes to make it fun," says Broach, who was dressed up as the Tin Man.

As the firm has grown, some of the fun has been replaced by formality, including daily morning and weekly meetings within each investment group, as well as quarterly firmwide meetings. There is even a monthly in-house newsletter. Samberg says that one of the reasons he hired Wien was to help maintain Pequot's casual and creative culture.

Wien sees culture as critical to a firm's success over the long haul -- otherwise, top people will be inclined to strike out on their own. Wien says he and Samberg learned from their days at Weiss, Peck & Greer that as a firm staffs up, senior management needs to treat investment professionals well and ensure that they are recognized for their contributions. "Art and I worked in a place that attracted terrific talent and had terrific results," Wien recalls. "But ownership held us back, and all the good people left."

At Pequot, Wien and Samberg hope to create an environment where people feel that they can have a good time and get something out of the place -- intellectually, emotionally and monetarily. "In most businesses there are nonmonetary incentives," says Samberg. Wien adds that it's important for professionals to feel they can grow and interact with other smart people. He and Samberg encourage constructive conflict. "People should have a good time arguing out ideas and feeling safe," he says.

Pequot's expansion plans took a hit last summer when John Mack, after only three weeks as chairman, told Samberg that he was leaving to become CEO of Morgan Stanley. Although Samberg was disappointed, he knew his friend was making the right choice. After all, Mack had spent 29 years at Morgan Stanley and had been president of the firm before Purcell pushed him out in 2001. (Mack turned down several requests for interviews for this story.)

Mack is exactly the kind of guy Samberg and Benton were looking for to run their firm before they split up. "John is much better than what we could have gotten," says Samberg. "He is one of a kind."

Samberg hasn't replaced Mack and doubts that he will. He says any replacement would have to be a high-powered Wall Street type who would arrive with an agenda. "If the person can't do what I think he can do, it will be a miserable experience," Samberg notes.

Still, Mack's abrupt departure left a void in the company's strategy, especially in building up Pequot's often overlooked venture capital business. Since 1997 the firm has quietly run six private equity funds specializing in three core areas: information technology, applied technology and health care. Pequot currently has about 55 companies in its private equity portfolio, and Samberg was hoping that Mack would help build that side of the business.

Samberg hints that he is spread a little thin these days trying to manage his own funds while also running a fast-growing business. When he is managing the firm, he has less time to monitor his stocks, many of which need close attention given their inherent volatility. He stresses that he is still responsible for Pequot Partners' technology and energy investments, and he speaks with co-managers Corasaniti and Takata every day about stocks in other sectors.

Samberg admits that there may come a time when he will need to dial back from the investing side. "I'm not saying I'll necessarily lead-manage in four or five years," he says. "But you need to have skin in the game."

Given the breadth of Pequot's expansion plans, investors are going to expect Samberg to keep skin in the game. Ultimately, however, having a large menu of fund offerings will prove meaningless if they don't perform well. "Performance is critical," Samberg acknowledges. "It's numbers, numbers, numbers."

So why is Samberg embarking on such an ambitious plan at a point in life when most people are starting to slow down?

Former partner Dawson says Samberg always dreamed of creating a large money management firm. Samberg himself says that he wants to build a firm that will outlive him, dismissing the skeptics who contend he is dressing up Pequot to eventually sell it.

"If you build to sell, you build poorly," he says. "I know it sounds trite, but it's the truth."

Columbia Business School dean emeritus Meyer Feldberg says that after Samberg nearly died five years ago, he could have decided to chuck it all and just relax, travel and play tennis. "But he didn't think his career is over, and I don't think it is over," says Feldberg, who is currently a senior adviser to Morgan Stanley while on a two-year leave from his position as Sanford C. Bernstein professor of leadership and ethics at Columbia. "He is expanding and redefining the nature of this business."

In a way, Samberg is executing the expansion plan he and Benton laid out for themselves before his unexpected illness. And although his vision seems to be more sharply focused than it was when he and Benton abandoned that plan more than four years ago, Samberg has no regrets that it took this long. "The stars are now aligned," he says.

Art Class 101: Lessons in growth investing

An early investor in Pequot Capital Management once told Arthur Samberg that one of the key rules of business is to focus on what you do best. So even as he embarks on Pequot's grand expansion, launching new funds and growing the firm, Samberg hasn't lost sight of what got him where he is today -- long-short growth investing. The firm's core growth strategy remains central to Pequot's research process.

"We are trying to find undiscovered growth stocks," says Mark Broach, who manages Pequot Scout, the firm's small-cap fund. "We ride a stock as it undergoes a wave of discovery."

Samberg and his investment teams look for companies and industries undergoing secular growth or thematic changes -- what he calls once-in-a-generation transformations. "This is where investors can experience big moves rather than a bunch of little wiggles," explains Michael Corasaniti, head of research for the core global team. Frequently, such transformations are the result of changes in regulation, tax laws or technology.

For his flagship Pequot Partners fund, Samberg typically invests in six to eight different themes at any one time. During the 1990s he was early to identify the opportunity in computer networking, playing that trend through hardware makers such as Cisco Systems and EMC Corp.

More recently, Pequot Capital has been riding several other once-in-a-generation changes, including what Samberg says is a fundamental shift in the energy market: Demand for refined oil products now outstrips supply. Samberg is confident that this trend will persist for several years, in large part because China is trying to lock up an energy supply to meet its insatiable needs. As of September 2005, Pequot's largest energy holdings were Houston-based Transocean, which provides offshore contract drilling services, and Los Angeles­based oil and gas producer Occidental Petroleum Corp.

Samberg is sanguine about the outlook for technology stocks. He says companies developing products and services used in third-generation wireless networks and wireless Internet should do well and that Microsoft Corp. investors may finally enjoy a rally as the software giant gears up for a huge product cycle. Samberg is also excited about the boom in Internet advertising fueled by Google and Yahoo!, both of which Pequot owned at the end of September.

Fundamental research is central to the investment process at Pequot Capital, as Samberg and his team try to determine whether a company has cash earnings and is creating real value. "You must make sure you are buying real assets," he says. Even so, Samberg stresses that interpreting a trend is an art that goes beyond the numbers. "Understanding the cycle is the most difficult thing to get right," he notes. "In the '90s the willingness to suspend disbelief is what sustained the trend."

Unlike Pequot Partners, which invests in mid- to large-cap companies, Pequot Scout searches for opportunities in stocks with market capitalizations below $1 billion -- often less than $500 million. Portfolio manager Broach says that slice of the market has become increasingly attractive as Wall Street firms have cut back their research coverage. "This works to our advantage," says Broach, who oversees a team of ten analysts. His fund is a longtime holder of Lifeline Systems, a Framingham, Massachusetts, company that provides personal emergency response services for seniors.

These days Pequot is looking for opportunities abroad. "Finding alpha is much more difficult in the U.S.," says chief investment strategist Byron Wien, who is helping to spearhead Pequot's aggressive move into Asian securities.

Samberg explains that the most money is made where there is a major change. Today that's more likely to be in Asia than in Europe, he adds, because of the enormous growth in China and India.

Wien says it is hard to invest in American stocks without understanding China. "China is a major exporter," he says. "Its products have a major impact on U.S. manufacturers and retailers." -- S.T.