No less influential private equity figures than David Bonderman and Henry Kravis have warned about their impact. Rubenstein’s Carlyle has recently announced it is planning to manage its own products in this area, underlining the message that hedge funds are here to stay.
In the European hedge fund arena, one market is dominating. London increased its share of global hedge fund assets under management from around 15 percent to more than 20 percent during 2004.
Figures released by UK promotional services agency International Financial Services London (IFSL) show that the amount of money managed by the 600+ hedge funds based in London rose by 60 percent to reach $190 billion (€146 billion) last year.
London’s total share of the European hedge fund industry rose 4 percent to 74 percent in 2004, although if figures for fund of funds and US hedge funds with trading desks in London were included, the IFSL estimates the total would be closer to 90 percent.
Factors that make London attractive to the hedge fund industry – it ranks second globally behind New York – include a favourable regulatory environment and the proximity of prime brokerage services offered by London-based investment banks.
According to a report in The Times newspaper, the European hedge fund industry generated revenues last year of £13.2 billion and profits of $4.8 billion.
The hedge fund industry is not just posing a threat on the deal side for private equity houses, but is also impinging on their ability to hire and retain investment professionals.
The ability of hedge funds to offer significantly higher salaries and incentives has made it more difficult for private equity firms to keep staff. In March, it was reported that Och-Ziff, a US hedge fund recruited David Stonehill, a principal at Blackstone Group and Anthony Fobel, a director of CVC Capital.
The trend of convergence between asset classes has not gone unnoticed in private equity circles. Speaking at a recent Yale University private equity event, Rubenstein, co-founder of The Carlyle Group said: “In ten years, there won’t be private equity funds and there won’t be hedge funds. There will be blended pools of capital called alternative investment funds.”