MarketWatch – Hedge funds have moved into private equity big time but face problems over the valuation of these new investments.
Traditionally, short-term investors in public stocks, hedge funds have become players in the buyout, real estate and even venture capital market as they seek to sustain returns in an increasingly competitive space.
The trend has been accelerated by the introduction earlier this year of new Securities and Exchange Commission rules requiring hedge fund managers to register for the first time. Managers that prohibit investors from redeeming capital within two years are exempt from the rule and a number of hedge funds have used the lock-up process to escape registration.
As a result, the number of hedge funds carving an illiquid asset out of an existing fund tying up investors’ money for a period of several years – referred to as a side-pocket – has risen dramatically over the last few years.
“Some 25% to 30% of our clients now have some allocation to side-pockets – this is very different from just two years ago,” said Craig Abruzzo, Managing Director and Co-Head of Risk Management for Equity Financing Services at Morgan Stanley (MS), speaking at a recent Securities Industry Association conference in Manhattan.
