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Hedge Funds Look For Profit In Private Equity

by Carla Johnson, Investors

01 December 2004

As ever more hedge funds chase diminishing opportunities in their traditional markets and struggle against disappointing returns, some are beginning to turn to the world of private equity to find fresh profit opportunities, Reuters reports.

"The low-hanging fruit has gone. Hedge funds are looking elsewhere, for broader mandates and longer lock-ups,” observed Steven Costabile, head of private equity funds at AIG Global Investment Corp, during the Blue Ribbon Hedge Fund Symposium on Monday.

According to Costabile, anecdotal evidence suggests that hedge fund activity is rising in private equity investment.

However, others suggest that hedge fund interest in this sector is already at a point where returns are diminishing, as too much money is chasing relatively few opportunities. Warnings have also been sounded that private equity could suffer the same fate as convertible arbitrage, which has been one of the worst performing sections of the industry this year.

According to Tara Capital’s Hedge Fund Barometer, sentiment has consistently shifted against convertible arbitrage strategies in recent times, due largely to a dip in implied volatility on longer term convertibles, resulting in “relatively significant losses” for many funds in this sector.

Other figures show that convertible arbitrage strategies suffered net outflows in the third quarter of 2004, contrasting sharply with the massive inflows seen accross the hedge fund sector this year.

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