Private Equity Funds Dressing Up As Hedge Funds

by Carla Johnson, Investors Offshore, London

22 May 2002

Here's a question for your investment pals: what exactly is a 'diversified alternative investment management firm'? The acronym isn't much cop: DAIMF - you can't even pronounce it. And maybe you shouldn't; it's the sexy new name adopted by a private equity fund that can't turn a profit doing what it said it was good at, and as a result has had to jump on the hedge fund bandwaggon.

For a savvy high net worth investor in the 1990's, private equity succeeded hedge funds as flavour of the decade, so perhaps it shouldn't be any surprise that the beached private equity whales of 1998 are being re-born as the hedge fund dolphins of 2002.

US venture capital firms received commitments of just $2.2 billion in the first quarter of 2002, reflecting the difficulty of finding good new private sector investments, so it should be no surprise that those private equity funds with surplus capital are looking to hedge funds to park their money in a place where it might earn its keep.

The Wall Street Journal reports that the Carlyle Group, which has $13 billion under management in venture capital, buyout funds and real estate, formed a hedge fund investment team earlier this year; the firm is said to be planning two products: a fund that allocates money to a variety of outside hedge funds and a fund that invests in startup hedge funds. The newspaper says that Gleacher & Co., a New York private equity, mezzanine and high yield investment firm, also has plans for multimanager hedge funds.

Both companies started out as investment banking boutiques, and the expansion into hedge funds can be portrayed as a step on the way to becoming, yes you got it, diversified alternative investment management firms.

The advantage of hedge fund activity for private equity funds, which earn their revenue when companies exit into the stock market or into trade purchases after maybe as long as 10 years, is that hedge funds produce relatively stable performance fees. So when private business is scarce, and exit values are low, they provide a useful contribution to current costs.

Recommended