This paper examines the role of hedge funds during the technology bubble. It finds that hedge funds did not correct stock prices but instead heavily invested in technology stocks. This suggests that hedge funds may have been riding the bubble rather than stabilizing it. The study challenges the efficient markets hypothesis, which posits that rational investors always stabilize prices. Instead, it supports models where rational investors may prefer to ride bubbles due to predictable investor sentiment and limits to arbitrage. Technology stocks on NASDAQ rose to unprecedented levels before March 2000. These valuation levels were extreme, indicating another episode in the history of asset price bubbles. The paper argues that the stock price increase was driven by irrational euphoria among individual investors, fueled by media hype. However, the study also finds that hedge funds were not simply unaware of the bubble. Instead, they anticipated price peaks and reduced their positions in stocks that were about to decline, thereby avoiding much of the downturn. This is reflected in the substantial excess returns hedge funds earned in the technology segment of the Nasdaq. The paper also finds that hedge funds were able to predict some of the investor sentiment behind the wild fluctuations in valuations of technology stocks. This suggests that the technology exposure of hedge funds cannot simply be explained by unawareness of the bubble. The study is consistent with recent theoretical results on limits to arbitrage, which suggest that rational investors may be reluctant to trade against mispricing due to risk aversion and synchronization risk. The paper uses hedge fund holdings data to analyze the trading activities of hedge funds. It finds that hedge funds were riding the technology bubble, with their portfolios heavily tilted toward highly priced technology stocks. The proportion of their overall stock holdings devoted to this segment was higher than the corresponding weight of technology stocks in the market portfolio. Relative to market portfolio weights, the technology exposure of hedge funds peaked in September 1999, about 6 months before the peak of the bubble. The study also finds that hedge funds skillfully anticipated price peaks of individual technology stocks. On a stock-by-stock basis, they started to cut back their holdings before prices collapsed, switching to technology stocks that still experienced rising prices. As a result, hedge fund managers captured the upturn, but avoided much of the downturn. This is reflected in the fact that hedge funds earned substantial excess returns in the technology segment of the Nasdaq. The paper concludes that hedge funds did not exert a correcting force on prices during the technology bubble. Among the few large hedge funds that did, the manager with the least exposure to technology stocks—Tiger Management—did not survive until the bubble burst. The study also finds that aversion to arbitrage risk and frictions such as short-sales constraints alone are not sufficient to understand the failure of rational speculative activity to contain the bubble. While they may explain the unwillingness of professional investors to short overpriced technology stocks, they do not explain our finding that hedge funds held long positions in these stocks.This paper examines the role of hedge funds during the technology bubble. It finds that hedge funds did not correct stock prices but instead heavily invested in technology stocks. This suggests that hedge funds may have been riding the bubble rather than stabilizing it. The study challenges the efficient markets hypothesis, which posits that rational investors always stabilize prices. Instead, it supports models where rational investors may prefer to ride bubbles due to predictable investor sentiment and limits to arbitrage. Technology stocks on NASDAQ rose to unprecedented levels before March 2000. These valuation levels were extreme, indicating another episode in the history of asset price bubbles. The paper argues that the stock price increase was driven by irrational euphoria among individual investors, fueled by media hype. However, the study also finds that hedge funds were not simply unaware of the bubble. Instead, they anticipated price peaks and reduced their positions in stocks that were about to decline, thereby avoiding much of the downturn. This is reflected in the substantial excess returns hedge funds earned in the technology segment of the Nasdaq. The paper also finds that hedge funds were able to predict some of the investor sentiment behind the wild fluctuations in valuations of technology stocks. This suggests that the technology exposure of hedge funds cannot simply be explained by unawareness of the bubble. The study is consistent with recent theoretical results on limits to arbitrage, which suggest that rational investors may be reluctant to trade against mispricing due to risk aversion and synchronization risk. The paper uses hedge fund holdings data to analyze the trading activities of hedge funds. It finds that hedge funds were riding the technology bubble, with their portfolios heavily tilted toward highly priced technology stocks. The proportion of their overall stock holdings devoted to this segment was higher than the corresponding weight of technology stocks in the market portfolio. Relative to market portfolio weights, the technology exposure of hedge funds peaked in September 1999, about 6 months before the peak of the bubble. The study also finds that hedge funds skillfully anticipated price peaks of individual technology stocks. On a stock-by-stock basis, they started to cut back their holdings before prices collapsed, switching to technology stocks that still experienced rising prices. As a result, hedge fund managers captured the upturn, but avoided much of the downturn. This is reflected in the fact that hedge funds earned substantial excess returns in the technology segment of the Nasdaq. The paper concludes that hedge funds did not exert a correcting force on prices during the technology bubble. Among the few large hedge funds that did, the manager with the least exposure to technology stocks—Tiger Management—did not survive until the bubble burst. The study also finds that aversion to arbitrage risk and frictions such as short-sales constraints alone are not sufficient to understand the failure of rational speculative activity to contain the bubble. While they may explain the unwillingness of professional investors to short overpriced technology stocks, they do not explain our finding that hedge funds held long positions in these stocks.