Celebrated bank stock analyst Carole S. Berger has never shied away from controversy.

A month ago her grab-the-bull-by-the-horns approach came to the fore when-having been downsized out of a job as Travelers merged Salomon Brothers and Smith Barney-she left Wall Street and started a hedge fund that invests in financial services stocks.

The move was doubly startling. Why would an experienced bank analyst with a sharp eye for picking stocks pass up the well-compensated brokerage post she surely could have secured? And why leap into a field populated with short-sellers, bottom-fishers, and other financial gunslingers?

"Berger," said sources at the time, "was one of the best on the Street."

Ms. Berger, however, had had enough of playing the role of a mainstream Wall Street analyst. When she left Salomon Brothers in December, she had spent 23 years covering financial institutions for investment houses. She wanted to call her own shots.

Working at a hedge fund demanded more creativity, she reasoned.

Unlike mutual fund managers, hedge fund managers can use a variety of investment techniques, such as selling short, using options, or futures. Managers invest a significant amount of their own money into a hedge fund and are compensated solely on their performance. Investors in hedge funds are accredited, meaning they must have a net worth of $1 million or make at least $200,000 annually for two years in a row, according to the Securities Exchange Commission.

In April she started Berger*Jackson Capital Management LLC with Jennifer Jackson, a portfolio manager who also has served on the boards of several large companies.

The partnership runs a financial services hedge fund and a diversified hedge fund. With the sector fund, Ms. Berger plans to invest in a range of financial institutions, with a focus on banks, thrifts, and brokerages.

"As an analyst I was restricted from investing in the companies I covered," Ms. Berger said. "As a fund manager, those restrictions no longer exist; I will be investing along with my partners. There is no better time to get off the sidelines and get into the game."

Such a career move for a sell-side analyst was unheard of just a few years ago. Hedge funds managers have always been viewed as a mercenary lot, with no compunction about dumping or shorting a company's shares on short notice.

But the face and reputation of the hedge fund manager is changing, said George Van, who heads up hedge fund consulting firm Van Hedge Fund International Advisors in Nashville.

Hedge fund managers are "no longer the young traders who at the age of 29 decide to start their own show," Mr. Van said. "It's more seasoned veterans."

Indeed, as layoffs on the Street increase and plum positions become more scarce, bank analysts are packing up their investing savvy and heading into hedge fund territory.

Thomas K. Brown left Donaldson, Lufkin & Jenrette for Tiger Management Co., and Alison Deans left Smith Barney for Zweig DiMenna Partners, which runs three hedge funds. Jeffrey Miller, formerly of Keefe, Bruyette & Woods, launched the Acadia Hedge fund earlier this year.

Also driving some of these veterans is the physical and emotional toll of the sell-side job. In the last year at Salomon, Ms. Berger spent two- thirds of her time talking to institutional investors. The rest was spent doing research.

Marketing "was totally consuming and emotionally draining," Ms. Berger said. "I was doing research on a plane, crammed always in the middle seat between two people. I was always eating airplane food. I felt like I was living out of a trunk. You could never imagine."

Ms. Berger, like many other analysts on the Street, also was becoming increasingly uncomfortable with the blurring lines between research and investment banking.

Analysts are finding themselves under more pressure to bring in business for the investment banking side, Ms. Berger said.

"I just got tired of playing monkey in the middle."

As more of the Street's major talent jumps on board, the bad rap that hedge funds have is finally giving way to a more respectable one. And though financial services hedge funds have yet to roil the stocks of major banking companies, their influence is growing.

Three years ago Michael H. Cook, the head of financial hedge fund Berkshire Partners, took a stake in Onbancorp thrift and tried to pressure the company to sell. Mr. Cook was unsuccessful, but his efforts caught the attention of financial hedge fund owner Seymour Holtzman, whose shareholder activism eventually led to the sale of Onbancorp to First Empire State, which is now called M&T Bank Corp. Mr. Holtzman is currently putting Ambanc Holding Co., a small thrift in Amsterdam, N.Y., under fire to sell.

Ms. Berger does not see herself as a shareholder activist. But she does see a new prominence among the bad boys of investment vehicles.

"I'm not sure where hedge funds got their bad reputation," Ms. Berger said. "But I never had a problem with them when I was on the sell side. I knew I was dealing with knowledgeable people."

Ms. Berger also said that more sophisticated investors are leaving mutual funds to put their dollars into hedge funds.

"The bulk of my net worth is in this fund," Ms. Berger said. "I will only make money if I make money for my client. A mutual fund manager gets paid a fee whether he makes money for you or not.

"If you were wealthy, who would you go to? " she asked.

Hedge funds can be among the most lucrative financial vehicles around, because of the variety of investing techniques at a manager's disposal, Ms. Berger said.

When the Asia economic crisis sent Citicorp's stock sprawling in mid- October, many managers decided to just buy and hold, Ms. Berger explained.

But a hedge fund manager who bought the stock, shorted it, and then bought it again between mid-October and November could have earned as much as 95 basis points in that brief period, Ms. Berger said. "The investor who bought and held the stock would have made only 15."

The number of hedge funds in the United States rose 11% last year to 3,790, according to a tally by George Van of Van Hedge Advisors International Inc., Nashville.

Equity under management grew to $159 billion, from $125 billion, in the same time period.

The growth in the number of financial services hedge funds has been flat, but those funds have outpaced others in returns, Mr. Van said.

"As long as financial services continue to consolidate and create economies of scale, I don't see why they should not continue to do well," Mr. Van said. "They are beating technology, which is one of the driving forces of the economy."

Financial services hedge funds for the first quarter returned 14.7%, compared to the technology sector, which returned 9.9%, and health care, which returned 7.7%. The only sector that beat financial services funds was media/communications, which returned 16.1%

"The factors driving consolidation have become more compelling recently," Ms. Berger said. "Merger activity will not slow down. It has turned a new corner."

Charles Gradante, who heads up Hennessee Hedge Fund Advisory Group, agreed that there is a trend of sell-side analysts starting their own financial hedge funds. However, those that have started their funds recently have "missed the boat."

"All the easy money has been made," said Mr. Gradante, who has monitored hedge funds for the last six years. "Most of the boom in financial services hedge funds is over.

"A lot of these new managers look good on paper because they have had the wind on their backs," he said. A dip in the market, he said, will provide a better test of their skills.

Mr. Gradante is also skeptical about sell-side analysts becoming hedge fund managers because many are lacking a portfolio of hedging skills.

"Sell-side analysts tend to be good stock pickers in the long term, but many of them are could not even put a 'hold' or even a 'sell' on a stock," he said. "Hedging means that you might have to short a stock in the short- term."

Ms. Berger bristles at the thought.

"Trading is not necessarily the name of the game," Ms. Berger said. "Good stock-picking is."

Furthermore, "I have never been a wishy-washy analyst," she said. "If you talk to my clients, I've never equivocated."

Ms. Berger is so confident in the venture that she expects to have $100 million under management by next year.

Most of the assets so far under management belong to her or her family. "So," Ms. Berger said, "I can tell people with a clear conscience that if this doesn't work, not only do I not have a job, income, or savings, but I can't even go home to my mother."

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