Hedge Funds and Private Equity firms at their peak?

At a recent Reuters seminar speakers made their point that the hedge fund and private equity industry is at a near term peak in their cycle after the rampant growth of both industries in the last few years.

Anthony Bolton of Fidelity said "Private equity and hedge funds both have cycles, and I think we're now at the peak of the cycle for the time being," and added "The flow of money has encouraged some mediocre people. They will all be wiped out in the current environment, which will allow the good people to go on."

How they will be 'wiped out' was not clear but maybe he was suggesting that these 'mediocre' managers will simply not be able to sustain the hedge fund business model with their current investment strategies. It's true that in an industry of $2 trillion and, essentially being conducted in a bull market, some managers will find it difficult to survive in a market that is less predictable.

Many funds have been battered by the equity and credit market woes which has prompted some commentators, including us, to suggest that further defaults in the sub prime markets and the turmoil in the equity markets will kill off a number of funds or, at the very least, cause them to be eaten by bigger funds.

As far as the private equity market is concerned there is a virtual standstill because of difficulty in obtaining credit, which is a big part of the market. The Bank of England Auction for loans was expected to produce interst rates over 6% to win on a bid although wider collateral is to be accepted, but still..6%!

"As the credit market currently stands, the large leveraged buyout market in the Western world does not exist today," said Charles Sherwood, a partner at private equity firm Permira, pointing out that the business model depends on the use of leverage, or heavy borrowing, to "magnify" returns.

"That magnifying glass today is broken. (However), I don't think there is huge pressure. Private equity firms can sustain a period of reduced activity."

Also affecting the private equity market is the lack of IPO's being completed. Private equity companies rely on taking a business private, giving it some spit and polish and then selling it back to the market in an IPO at a higher price than they paid for it. With the equity markets shying away from virtually all IPO's this route is looking increasingly difficult, in the near term, for the private equity groups.

They say every cloud has a silver lining and that was provided by Christopher Fawcett, CEO and founding partner of fund of hedge funds firm Fauchier Partners. He said there had not been the levels of redemptions he hoped for in certain funds.

"We were hoping for redemptions so we could put money in," he said. "There have been pockets of redemptions in certain strategies and certain hedge funds, but not across the industry."

That's the spirit Chris! You get the inaugural 'Asset Manager Financial Hero of the Week' award for being the most positive. This was snatched away from Florian Homm whose total disregard for tons of cash had made him a front runner for most of the week.