There seems to be a growing appetite for private equity and a waning appetite for hedge funds. A recent survey of institutional investors showed more of them planning to raise their stakes in private equity versus hedge funds.

Alistair Barr at reports that for the first time in over a decade more money flowed out of hedge funds than flowed in. Underperformance in arbitrage-like strategies and fund of funds seem to be taking it on the chin.

“People have become disappointed,” said Vladimir Belinsky, president of Hermitage Advisors Ltd., which advises wealthy individuals, endowments and foundations on investments including hedge funds. “Returns have been subpar.”

Noted private equity investor, Thomas Lee sees the incursion of hedge funds onto private equity turf working out well for the private equity firms. In addition to joint bids for companies, Lee states:

“Not only do hedge funds supply money to companies, but activist hedge funds tee-up companies for private equity.”

The world of alternative investments is nothing if not fluid. It will be interesting to see how big a pullback we see in hedge fund demand and whether private equity firms are forced to increase the size of the deals they attempt. Future megadeals seemingly would include capital from both hedge funds and private equity firms.

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