In the late nineties, the funds’ investor base began to change from individuals (who, on the whole, maintained their allocations in hedge funds) to institutions, led by David Swensen, head of Yale’s endowment. Swensen pioneered the endowment model, turning a portfolio invested mostly in marketable securities like stocks and bonds—which convert easily into cash—into a portfolio invested mostly in alternatives like hedge funds, private equity, and real estate—assets that are more illiquid and higher fee in expectation of higher returns. He spun around $1 billion in 1985 into $10 billion by 2000. Encouraged by his performance, others followed suit. Pensions, endowments, foundations, and other institutional money meant new sources of untapped capital, providing significant inflows. By the early aughts, the investor base had switched from mostly individuals to mostly institutions and funds of funds. Total AUM in the industry swelled to about $2 trillion in the second quarter of 2008.

Then came the financial crisis. Hedge funds suffered in 2008 but not as much as the market, with the average fund down 18 percent compared to 38 percent for the S&P 500. Asset allocators lost confidence, redeeming $382 billion that year. There’s some debate about the role of hedge funds in the crisis: most narratives say while they weren’t one of the main causes of the collapse of the economy, they withdrew assets and sold securities at such large scales that they further destabilized the financial system. Those who survived were wounded but not dead. Several managers made prescient calls and corresponding fortunes. Hedge funds were seen by many in finance—not by the public, who had a strong and justifiably negative view of all of Wall Street—as, still, the place to make your bets; they weren’t the baddest of the bad guys. From 1990 to 2009 the average stock hedge fund beat the S&P 500 total return by over 5 percent a year. Yes, there were flops, notably Long-Term Capital Management, a fund helmed by, among others, two Nobel laureates who had mismodeled risk (and as a result, during the 1998 ruble crisis, their fund imploded)—but, by and large, hedge funds continued to deliver. In 2010 there were 7,200 funds managing over $1.5 trillion. They embodied the American dream at its peak: anyone could start a fund; with hard work, and good luck, anyone could get rich.