Chapter NineHedge Funds and Private

Equity

Hedge FundA hedge fund is an actively managed

investment fund that seeks an attractive absolute return, that is, a return whether markets go up or down

They are designed for high net worth individuals or investment institutions

World’s Largest Hedge Fund Managers (December 2010)

Fund Assets managed$bn

__________________________________________________________________Bridgewater Associates 60JP Morgan 41Paulson & Co 29.0Man Group 40Brevan Howard Asset Management 32Paulson & Co 32Highbridge Capital Management 27Soros Fund Management 27Och Ziff Capital Management 26Blue Crest Capital Management 25 Cerberus Capital Management 24

________________________________________________________________Source: TheCityUK (2011) Hedge Funds

Hedge Fund StrategiesHedge Fund Research tracks the results of

39 hedge fund strategies

The main strategies are:Equity hedge fundsGlobal asset managersRelative value arbitrageEvent-driven investingShort sellers

Hedge Fund InvestorsThey were confined to high net worth

individuals but today the various institutions are big investors, i.e.; insurance companies, pension funds, banks, endowments and foundations.

For small investors, the only way to get involved with hedge funds is to buy into a ‘fund of funds’. Unfortunately, there are now two lots of fees to be paid

Private EquityPrivate equity is a mixture of venture

capital for early stage companies and management buyouts. A public company is taken private for a few years and then either sold to a private buyer or floated on the stock exchange again

Buyout deals, usually heavily leveraged, were the mainstay of the industry

Largest Private Equity Firms, By Total Funds Raised, 2000-2010

Group $bn

____________________________________________________________________1 Kohlberg Kravis Roberts (NY) 46.72 TPG (Fort Worth, TX) 46.53 Blackstone Group (NY) 41.74 Carlyle Group (Washington DC) 40.65 CVC Capital Partners (London) 37.06 Apollo Global Management (NY) 30.67 Bain Capital (Boston) 29.18 Goldman Sachs Merchant Bank Division 28.89 Apax Partners (London) 24.810 Advent International (Boston) 21.7 __________________________________________________________________Source: TheCityUK (2011) Private Equity

Reasons for buyoutsA company is in difficulty and wishes to sell a

subsidiary

It may have made a major acquisition but does not want to hold on to some of the non-core assets

The original owners of the business may want to retire or sell their stake

Private Equity InvestorsThese include institutions, like insurance

companies, pension funds desperate for higher yield, subsidiaries of investment banks and, in the U.S., university endowments like Yale

For private investors, the inability to withdraw money quickly is a major disadvantage, together with the minimum funds involved. The best way for them is through private equity investment trusts, a private equity fund of funds and venture capital trusts

Investment levels in private equity firms can vary substantially year on year and pretty much reflect the performance of equity markets

Hedge Funds and Private Equity Coming CloserThere is now growing evidence of firms with a

foot in both camps. Many private equity funds have set up hedge funds, especially in the U.S., e.g.; Blackstone. This includes activities that focus on the areas of distressed debt, long/short equity and multi-strategy business

This does raise questions of conflicts of interest and insider trading. The advantage of the alliance is that both groups can share information about market trends and attract investors looking at either vehicle. The disadvantage is the scope for insider trading