Private equity envy

Hedge fund managers are going through an awful time right now – and are desperately trying to shore up their defences.

Year to date, the asset class has suffered its worst performance in 18 years, according to data from Hedge Fund Research. In some cases the losses are so staggering that well-established, prominent fund managers, like commodities-focused Osparie Capital, are shutting up shop and returning capital to investors.

Other hedge funds booking billion dollar losses have blocked investors from making potentially crippling capital withdrawals. At least one of them, Atticus Capital, has done this by employing a trick from the private equity manual.

The London-based activist fund put its approximately 11 percent stake in German exchange Deutsche Börse into a private equity-esque side pocket with a long-term lock-up in order to prevent investors from pulling out.

Though a spokesman confirmed Atticus moved the stake into a side pocket in March, he declined to provide details as to its specific structure.

Regardless, the move effectively turned a liquid position into an illiquid one and reportedly infuriated the investors. “It has gone down extraordinarily badly,” one investor told the Financial Times. “It has made them bloody unpopular.”

The spokesman declined to comment as to investor sentiment, but noted it isn’t the first time Atticus has used a side pocket. In 2002, Atticus moved its position in Price Communications into a side pocket, details of which the spokesman would not disclose.

Atticus maintains the most recent side pocket movement was to shore up its standing as a stable stakeholder with Deutsche Börse’s board, eliminating concerns over the prospect of a lessened stake following investor redemptions. Atticus and fellow hedge fund The Children’s Investment Fund, who together hold 19 percent of Deutsche Börse, yesterday said they would use their influence to increase shareholder value and potentially shake up the company’s structure.

Deutsche Börse turmoil aside, the message is clear: having a longer-term investment horizon, à la private equity, provides cushion for the manager and comfort for the company.

And for private equity firms, whose funds typically have 10-year lives, those horizons may be about to move out even further. Just today, 14-year-old mid-market fund American Securities closed a $2.3 billion (€1.6 billion) fund – with a 25-year investment mandate.

Patient capital, it seems investors are hoping, will be the way forward in today’s super-volatile markets.