NEW YORK -- Watch out, Warren Buffett.

Move over, Peter Lynch.

Here come Bill Ackman and David Berkowitz, a pair of newly minted Harvard Business School graduates who last year, at age 26 and 31, set up a private investment partnership, colloquially known as a "hedge fund," to manage money for seven millionaires and billionaires.

This is not only a personal coup of the first order for these young guys, it also is without recent precedent, according to other professional investors and financial consultants.

Big money simply doesn't hand over $30 million to two young men without prior professional experience to invest as they see fit. But this is what William A. Ackman and David P. Berkowitz have persuaded their partners to do by investing in Gotham Partners L.P.

And they have rewarded their partners, who have received a 28 percent profit since the fund's birth in March 1993. Comparatively, the Standard & Poor's 500-stock index gained 3.7 percent during that time.

Even in the first half of 1994, when many other investors have stumbled, the fund made a profit of 5.6 percent while the average hedge fund has lost 1 percent, said E. Lee Hennessee, who tracks hedge fund performance for Republic New York Securities Corp.

So it comes as little surprise that Ackman and Berkowitz are the darlings of the smart money on Wall Street. They have even received money from the billionaire Ziff family, which has a reputation for spotting good investors early.

Accomplished investors describe Ackman and Berkowitz as disciplined stock pickers who look for undervalued stocks.

"Young people are bright people," said one of their partners, Martin Peretz, a professor at Harvard University, editor in chief of the New Republic magazine and an experienced hedge fund customer. "They are not indentured to received wisdom."

A top professional investor in the fund said: "It is intriguing that they are up and running so well and yet lack much experience. We have never put money with people who have no professional background, but they are really smart guys who have impressed a lot of experienced investors."

Ackman and Berkowitz illustrate a trend in the investment management business toward younger and younger stock jockeys. Morningstar Inc., a Chicago-based mutual fund tracking company, said more than a third of all mutual funds are managed by people in their twenties and thirties.

The managers also mirror the widespread infatuation among recent college graduates for the investment management business. After a 20-year bull market in stocks and, until this year, in bonds, managing other people's money has become one of Wall Street's most profitable and well-paid activities. Superstar George Soros earned $1.5 billion last year from fees and capital gains.

The youth explosion in money management worries some older investment managers who see in the phenomenon a warning that the long-awaited bear market must be close behind.

Ackman and Berkowitz, to their credit, see this possibility as well. They note that Harvard Business School students are nothing if not mercenary and are routinely seduced by the best-paying business du jour. They also say that whenever Harvard graduates have piled into the "hot" field, that business has often come a-cropper.

Doom and gloom ill suits youth, of course, and Ackman and Berkowitz are too busy enjoying what they do best to dwell on the broader implications of young people managing other people's money.

Like many early achievements, their success has come from a combination of happy accident, force of will and sheer brainpower.

They met by chance in their first year at business school. "We were both in the 'sky deck,' " said Ackman, referring to the top row of classroom seats. "David said a lot of smart things and I thought, 'This is a sharp guy.' We became friendly."

Ackman knew he wanted to invest. He already was, in fact -- and doing well enough to pay about half the $45,000 annual tuition.

Berkowitz, who holds degrees in science and chemical engineering from the Massachusetts Institute of Technology, was less sure. With his strong analytical training, he was thinking about management consulting as a profession.

But after a summer working at Boston Consulting Group, a well-known management consulting company, he decided against it.

Early in their second year at Harvard, he and Ackman began talking seriously about starting their own hedge fund.

Hedge funds are investment partnerships that can use a variety of sophisticated investing techniques. The funds are run by investment managers who are the general partners in the interest of the limited partners. Hedge funds are unique because they tie the rewards the managers get to the overall performance of the partnership.

"One day I approached David with a copy of Seth Klarman's investing book 'Margin of Safety,' which I found fascinating," Ackman said. "This book was the catalyst."

Klarman runs the Baupost Group investment company in Cambridge, Mass., and lectures occasionally at Harvard Business School.

"When you read a book like Seth's and have some success in your own investing, you think, 'God, we could do this,' " Ackman said.

Ackman and Berkowitz decided to take what they thought was a "low-risk" approach to going into the hedge fund business. They planned to move to New York, share an apartment, work day jobs and invest at night. If they did well, they reasoned, they would have a track record to promote to potential investors.

Ackman decided to take a job at his family's real estate company and Berkowitz planned to join Bankers Trust New York Corp.

In New York, their low-risk approach was anything but. "It was actually a higher risk way to go," Berkowitz said. "Because the one thing we had going into the money management business was our personal reputations. If we did not devote full time to investing, that was more risky in the long run than leaving our jobs and going without salaries for a year or so."

Giving up his well-paid post at Bankers Trust was difficult for Berkowitz. "I come from a more modest background than Bill," he said. "My parents don't have the financial wherewithal to bail me out in the event that things go poorly. And I come with some personal debt from school."

Nonetheless, he joined up at Ackman's urging. The first thing they did was design a 17-page document to woo investors.

The document -- they called it a treatise -- described their investment approach, compared it with other methods, analyzed the state of the securities markets, described the target partner and summarized their backgrounds.

"We are primarily value investors," it begins.

Value investing relies on detailed research into companies to spot investments where the price of the shares sell far below the actual value of the business. The foremost practitioner of value investing is Warren Buffett, chief executive of Berkshire Hathaway Inc.

"We are risk averse," the document said, "and will only consider investments where the risk {of loss} is mitigated by a comfortable margin of safety. Simply, we seek to purchase intrinsic value at a discount... . To us, a great company purchased at an excessive price is a risky investment."

The document also said the fund rejects short-term trading and won't invest using borrowed money, known as "margin leverage" on Wall Street. "Leverage simply amplifies both negative and positive returns. We are in no rush," they wrote. "We are comfortable with the long-term effects of compound interest ... We are primarily concerned with preservation of capital."

The document detailed what Ackman and Berkowitz expected to be paid for their services as the partnership's general partners. They were to get a management fee equal to 1 percent of the money in the partnership and one-fifth of all the profits minus the management fee.

To allay any worries, Ackman and Berkowitz promised to put all their own money -- about $350,000 -- alongside that of the limited partners.

Despite the impressive sales presentation, potential investors checked out the two managers. Ackman said prospective investors "talked to professors {and} past employers. One guy wanted to see college recommendations. They wanted to know not only if we were smart and had good analytical skills, but if we were disciplined and ethical."

Of 100 potential investors approached, they recalled, only six signed up. The smallest investment in the limited partnership was $50,000.

The seventh investor was Ackman's father, who, after having strongly opposed his son's ambitious plan, became one of Gotham Partners' biggest initial investors.

On March 1, 1993, Gotham Partners opened for business with $3 million in investment capital and promptly lost 3 percent the first month -- almost all on one bad investment. "On an annualized basis, that is a 40 percent decline," Berkowitz said. "Now we were scared."

In a lengthy letter to their partners, Ackman and Berkowitz explained the situation, but went on investing.

One early success was an investment in generic drug maker Circa Pharmaceuticals Inc. Circa had hit hard times when it was caught submitting for Food and Drug Administration approval other companies' pills and passing them off as the fruits of its own research and development. After this became public, Circa's management was thrown out and the stock price crashed to $4 a share from $50 a share.

Enter Gotham Partners L.P.

"Wall Street was just dumping the stock," Berkowitz said. "But it still had significant assets -- $50 million in marketable securities, a new manufacturing plant and an ownership interest in another drug company that actually made a real product people bought to alleviate late-stage symptoms of Parkinson's disease -- that were worth a lot, even assuming worst came to worst and the company was liquidated."

Gotham Partners started loading up on Circa shares at $4.12 1/2 and kept buying up to $6.25. The firm put about 10 percent of its money in the stock. By July, Circa shares were trading for $6.62 1/2.

Three months later Gotham Partners had sold its position at an average price of $9.47 a share for a spectacular 63 percent profit in less than six months.

The bet on Circa helped Ackman and Berkowitz finished 1993 with a 21 percent gain for their investors over 10 months, which outpaced the S&P 500 and other major stock indexes. Today, the two managers oversee $30 million, which comes in part from retained profits and money from new investors.

Ackman and Berkowitz get $300,000 a year in management fees, which has allowed them to move out of their windowless one-room office into spacious quarters and to hire an assistant. They even have a summer intern, Craig Nerenberg, a 17-year-old high school student.

From what Nerenberg says, Ackman and Berkowitz may not be the youngest, least-experienced hedge fund managers for long.

Nerenberg already has his own small hedge fund with $38,000 of friends' and family's savings. He said that he plans to wait until he is the "ripe old age of 28 like Bill" before turning pro.