Michael Steinhardt, one of the world's first and most-successful hedge-fund managers, says he barely recognizes the industry he helped create nearly 40 years ago.

Mr. Steinhardt founded Steinhardt Fine Berkowitz in 1967 when he was 26 years old. In the next three decades his fund, later renamed Steinhardt Partners, boasted average annual returns of nearly 25%.

WSJ.com: What about private-equity investments, which are becoming increasingly popular with hedge funds and require investors to lock up their investments for longer periods of time, as much as three years?

Mr. Steinhardt: Private equity, now that's a big danger, I think. People always had the opportunity to get out of my fund at the end of the year. I never had to lock up people for more than a year. If you're giving somebody money for a longer period of time than that, you are forking over a serious right. And I don't think you should do it so widely. And those hedge fund managers investing in private equity who have very little experience in that area probably won't perform too well.

WSJ.com: How much of your own money is in hedge funds, relative to other investments?

Mr. Steinhardt: I have most of my equity in hedge funds, usually with people whom I've know for a long time, in many cases with people who used to work with me. My objective is to create a portfolio which under almost no circumstances will lose money and under the best circumstances would make about 20% a year. Over the 10 years that I've been doing this, I've achieved a low double-digit return. In other words, I do not try to hit home runs in my present portfolio.

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