Chapter Nine Hedge Funds and Private Equity

Hedge Fund A 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 60 JP Morgan 41 Paulson & Co 29.0 Man Group40 Brevan Howard Asset Management 32 Paulson & Co32 Highbridge Capital Management27 Soros Fund Management27 Och Ziff Capital Management 26 Blue Crest Capital Management25 Cerberus Capital Management24 ________________________________________________________________ Source: TheCityUK (2011) Hedge Funds

Hedge Fund Strategies Hedge Fund Research tracks the results of 39 hedge fund strategies The main strategies are: Equity hedge funds Global asset managers Relative value arbitrage Event-driven investing Short sellers

Hedge Fund Investors They 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 Equity Private 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, Group $bn ____________________________________________________________________ 1 Kohlberg Kravis Roberts (NY) TPG (Fort Worth, TX) Blackstone Group (NY) Carlyle Group (Washington DC) CVC Capital Partners (London) Apollo Global Management (NY) Bain Capital (Boston) Goldman Sachs Merchant Bank Division Apax Partners (London) Advent International (Boston)21.7 __________________________________________________________________ Source: TheCityUK (2011) Private Equity

Reasons for buyouts A 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 Investors These 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 Closer There 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