Private Equity and Hedge Funds

How Hedge Funds and Private Equity Connect

Private equity and hedge funds have developed a strong relationship benefiting both partners. Private equity groups own many hedge funds and make long-term investments in hedge funds. Hedge funds have entered the private equity world too, joining with major players in the private equity industry to make large buyout deals. The attraction for hedge funds is the large amount of capital flowing into private equity from institutional investors and the hope that hedge funds can boost performance through buyouts. In 2006, the average hedge fund returned 13.9%, while the average buyout fund returned 25%.

Hedge funds aren't limited to big buyouts, they have started lending capital to smaller startups and middle-market firms. The move to private equity is logical, hedge funds have always tried to capitalize on often risky opportunities to make money. However, the risk may be too great for hedge funds in private equity, because hedge funds are known for making short investments. Private equity buyouts and even smaller venture capital investments are typically longer investments. Another risk is the illiquidity in private equity, which may be a problem for hedge funds if investors want to cash out their investment. Hedge funds are not afraid of risk so the relationship between private equity and hedge funds will probably only grow stronger in the future.

For a database of more than 1,000 private equity firms and their contact details see our Private Equity Directory.

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