It looks like hedge funds are beating out private equity in the battle of alternative investments.
Investors battered by the financial crisis a year or so ago are warming up to hedge funds a lot quicker than they are to PE funds as the financial markets continue to recover. And you can hardly blame them.
While hedge funds are easy targets for those who disdain enormous wealth, their reputations remained mostly intact while more questions continue to swirl around their buyout brethren. For one thing, unlike PE funds — as well as the regulated financial institutions for that matter — no hedge fund had to be bailed out with taxpayer money. And a large majority of hedge funds racked up strong gains in 2009.
“Hedge funds have had a very good time of it recently with regards to performance, while PE funds have not enjoyed the same kind of success,” an industry expert who follows both groups tells me. Oh sure, many hedge fund managers lost nearly half their money in 2008 and irked — all right, pissed off — their investors when they threw up gates and placed some illiquid assets into side pockets. However, they worked through the process without outside intervention. The free market will settle those disputes.
So, it is little surprise hedge funds are once again popular among investors, even though investors have cooled to funds of funds. Last year total hedge fund assets rose to $1.6 trillion, the second highest sum ever, while net outflows slowed down from the end of 2008, according to Hedge Fund Research Inc.
A recent survey compiled by Credit Suisse’s Prime Services business found that hedge fund investors estimate the industry will grow to $1.97 trillion by the end of the year, which would place it above the pre-financial meltdown peak.
The two most popular strategies this year: Global Macro, with 67 percent of investors increasing allocations, and Event-Driven strategies, 62 percent of investors increasing allocations. The favored geographic area is Asia-Pacific focused strategies, with 61 percent of investors increasing allocations.
Deutsche Bank, which conducted its own survey, said hedge fund assets, which it calculates to be only $1.5 trillion right now, will rise by $222 billion from just new money this year. However, this would bring the total below what it believes to be the all-time high of $1.9 billion reached in 2007, according to published reports.
In any case, the story is different when it comes to private equity. Just $50 billion in capital was raised in the first quarter of this year, according to Preqin, the London-based scorekeeper. While this was up 5 percent from the fourth quarter of 2009, it is still down more than 75 percent from the peak of $207 billion set in the second quarter of 2007.
Obviously, investors are still leery about giving them money. And I don’t blame them. For one thing, the funds have plenty of money and they are not exactly spending it. According to Preqin, they already have around $1 trillion in committed capital waiting to be invested. And in the first quarter of this year, just 307 private equity deals were announced with an aggregate value of $26.6 billion, down 35 percent from the previous quarter. Investors are obviously giving them a hard time. It is now taking the average fund more than 19 months to complete its fundraising, compared with just 12 months in 2007.
Meanwhile, the industry — widely perceived to be run by the smartest and the richest — suffered some humbling experiences of late. During the financial crisis, Cerberus, the hedge fund cum private equity fund cum total embarrassment, wound up having its investments in Chrysler and GMAC bailed out by U.S. taxpayers.
No hedge fund can make this claim.
Stephen Taub, who has covered the hedge fund industry for 30 years, is a contributing editor to Institutional Investor and Absolute Return-Alpha magazines and former editor of Financial World magazine.
