Hedge funds vs. private equity funds

31 May 2007

2 minute read

In one corner you have PE funds, in the other hedge funds. Which do you go for?

Dick Bove, analyst at Punk Ziegel & Co. in the US, says private equity funds are the best bet because they're liable to be more stable over time: "Most hedge funds are under pressure to function in short term markets, whereas private equity funds have more stable financing and are likely to offer better careers and more money over the next five-year period."

Bove's statement comes in the midst of contradictory noises from the hedge fund world. On one hand, the likes of Dillon Read Capital Management and Goldman Sachs' Global Alpha hedge fund (which fell 3.4% between January and April according to Bloomberg), have come unstuck. On the other, Man Group chairman Harvey McGrath is quoted on Reuters today as saying that the last 12 months have been 'vintage' ones for the hedge fund industry after profits at Man rose 13%.

Private equity pluses

If hedge funds are shakey, how much can you earn in the ever-expanding world of private equity? Base pay for PE associates in London is in the range of 50k to 70k, plus a bonus of 150% at the large US funds, or 50% to 100% at European funds.

Private equity minuses

Jobs still aren't particularly plentiful in PE, however - funds that used to have five to seven associates now have just 10 to 15. People are quitting after one too many auctions don't come to fruition. "People get fed up just working on deals that never close," says one headhunter.

Best off in banks?

With junior bankers as keen as ever to quit for private equity or hedge funds, one headhunter says there's a growing perception that mid-ranking investment bankers who stay put are the dregs of their class.

Meanwhile, with hedge funds such as Citadel behaving increasingly like private equity funds, the distinction between the two categories is increasingly blurred. And Bove says footloose analysts and associates are best advised to stay put: "Personally, I think we're in the middle of a bubble. A lot of private equity and hedge funds will go bankrupt in the next few years. Investment banks may be living off the flows created by private equity and hedge fund deals but they do at least have multiple sources of income."

AUTHORAnonymous

Insider Comment

ma
maneesh srivastava
9 August 2007
after reading the article it was not able to provide an understanding regarding the distinction between hedge fund and private equity fund
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ex
ex PE Exec gone to hedge fund
7 June 2007
After working on the umpteenth failed auction gone at a stupid price as an Investment Manager (no free evenings or weekends for several weeks) for my own sanity and pride (I hate being paid for no results) I left for a hedge fund. Best choice I ever made.
PE has turned into a skilled paper shuffler and negotiator. Investment judgement has gone out of the window as each house, except Alchemy, looks to leverage the hell out of safe assets and run them for a 4 year horizon. Unless you are already a partner, the future is nowhere near as lucrative especially as Gordon will inevitably change the rules on carry.
PE is mature and at a cyclical peak in the UK. No one at the top will leave until the outlook turns bad and carry will dry up for 3-4 years as the cycle comes off. PE was a wasteland 1991-6 following the mega deals at the top of the last big broad (i.e. non tech) boom. Also, mega funds will be challenged by LPs as returns fall. Watch this space.............
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FI
FIN
6 June 2007
It is undoubtedly a bubble for PE and HFs in many ways, but not by every definition and not for every class of firm. It's more a question of choosing the firm properly. If you are in a PE or HF and have a good offer from a good firm it should be considered.
The dotcoms, 'trons, steels and tulips were all over valued in their times. But people made their money (from the less informed) while others watched. Sure at the end of the bubble you might be wiped out if you don't take your losses or are over leveraged - but guess what... a job market bubble is not the same as an investment bubble. If a fund goes bust you will lose only your position and future earnings from that firm... you will still be you and carry your (growing) human capital.
I think this article is daft.
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