Glance of the Hedge Funds and Private Equity Industry
Thursday, December 17, 2009 15:23There have been some dire predictions about the outlook for the hedge fund and private equity industries in the aftermath of the financial crisis. But, as with so many of these forecasts, they will probably prove to be exaggerated.
Certainly both industries have been hit badly. Hedge funds had their worst ever year in 2008 and the combination of falling prices and investor withdrawals saw their assets under management shrink 27% to $1400 billion. More than that, the asset class was tarnished by its failure to deliver what many investors thought it promised—absolute returns and diversification. The Madoff scandal didn’t help either. Many funds of hedge funds that invested with Madoff clearly hadn’t done their due diligence.
Things were, arguably, even worse for private equity groups in 2008. It faces greater challenges in the boom days as it relied on the availability of cheap financing and leverage to help generate spectacular returns. The value of their existing holdings fell drastically, fresh acquisition activity slumped and their ability to exit investments via stock market listings was virtually non-existent.
Both industries face challenges. The prospect of increased regulation is one, although they have been unfairly blamed for their part in the financial crisis. Both will face pressure too for lower fees from their investors as the balance of power has shifted away from managers. Tax advantages may also be reduced in the future. Hence, neither industry will bounce back quickly. But risk appetite and the need for diversification will return, so will leverage, even if not to the same extent as before. And when they do bounce back, hedge funds and private equity funds will continue to occupy a prominent place in the alternative investment space.
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