Over the past decade, the number of private equity funds has doubled while the number of hedge funds has stayed flat. Yet the reasons for that shift aren’t entirely logical, according to Dan Rasmussen, founder of the Verdad Partners hedge fund —and a longtime critic of private equity.

“Capital has flowed away from an industry that has been forced to prove alpha under relentless scrutiny and toward one that has largely avoided it,” he said, calling it “a striking allocator paradox.”

“Talk to an endowment model CIO at a foundation or multi-family office, and you’re likely to hear something along the lines of ‘There’s no alpha in public markets,’” he elaborated in an email distributed to investors and followers. “Private equity, by contrast, maintains a distinguished aura of wisdom, long-term thinking, and value creation.” 

He suggested that allocators may be a little behind the times. Last year, hedge funds had their best returns since the financial crisis, gaining an average of about 12.6 percent, according to Hedge Fund Research. Meanwhile, private equity returns have underperformed the S&P 500 for at least five years, according to Cambridge Associates. In 2025, top-quartile global buyout returns averaged 8 percent (measured on a pooled internal-rate-of-return basis), according to consultant McKinsey & Co.

“We believe that the next few years will produce an ongoing reckoning in private equity,” Rasmussen said. “The hedge funds that have learned to find sustainable sources of alpha and thrive in this brutal market appear to us to be materially better than the hedge funds of 15 years ago.” 

For hedge funds, 2025 was a welcome change. For years, they have been facing “significant headwinds,” he said. These include what he called a “ripping S&P 500 index that has made diversification less appealing, and a fundraising environment enamored with private equity.”

The problem hedge funds face is that they mark to market, with real-time performance and easy redemptions of capital. “Weak processes, poor risk management, or spurious alpha are exposed and punished rapidly,” he said. 

These facts lead to a Darwinian environment in which only the strong survive.

That environment, he added, has led to the dominance of what he calls “apex predators” like Citadel, Millennium, Arrowstreet, and AQR that can hoover up “the best and brightest.” While he says Verdad is not “yet” an apex predator, it is a survivor. Last year it hit $1 billion in assets under management.

In contrast, “it’s been a boom time in private equity,” Rasmussen said, particularly among smaller firms. “A massive proliferation of new entrants has benefited from lower barriers to entry in a rapidly expanding market.”

Rasmussen suggested one reason is that private equity has been “largely insulated from [the] feedback loop faced by hedge funds.” He argued that returns have a long lag and are “wrapped in narratives about ‘long term value creation’” that create a “phony happiness.” Without the demands of accountability, he said, a larger number of private equity funds can survive.

A ChatGPT analysis of private equity firm websites came up with a marketing pitch that he said included “fluffy, airy concepts” — unlike the hard math hedge funds must show investors.

ChatGPT came up with “We partner with management teams and bring a differentiated platform and operational expertise to create transformative value/long-term outcomes.” 

“If ‘operational expertise’ or ‘value creation’ constituted a true and durable competitive moat in private equity, we should be able to observe it directly in the underlying fundamentals,” he said. But Rasmussen said his firm’s research has found little evidence of operational improvements relative to comparable public companies. Revenue growth and margins aren’t any better, and leverage-adjusted fundamentals “often deteriorate rather than improve over the hold period.”

He argued that when funds do generate higher returns, they are “largely explained by financial engineering.” 

More surprising, Rasmussen said, is that allocators are “in love with niche mid-market private equity” despite their lower growth rates and higher than average default rates.