We seem to wheeling around the world of alternative investmens recently. With stops at the world of private equity and venture capital we now move our attention to hedge funds. Hedge funds while having a lower profile of late still command a growing amount of assets under management. Therefore hedge fund trends can and will affect the capital markets – whether we like it or not.
Not surprisingly we should expect to find hedge funds astride any area that is particularly hot. For now the energy industry is hot. Ann Davis in the Wall Street Journal reports on the rush of capital into the energy industry.
Energy-related endeavors of all kinds are a magnet for cash these days, thanks to the gravity-defying rise of oil prices and the recent boom in investment pools that cater to deep-pocketed institutions and the wealthy. Some energy investments, to be sure, are relatively low-risk and involve industry veterans. But private-equity firms, hedge funds and other professional speculators are also pouring billions into unconventional loans, management teams with limited track records and IPOs on lightly regulated stock markets.
We are not trying to make the point that whatever is hot is necessarily a bubble waiting to happen. Although Davis does find some who believe that energy is the new Internet, the story is more nuanced. The article goes on to note that there are a number of worthwhile projects being funded that will increase energy availability. In any rush to invest a great deal of capital there will also be mistakes and missteps. Funds and their investors will lose money. That is however how this whole capitalism thing is supposed to work.
With their growing size and influence hedge funds are necessarily attracting more attention. Gregory Zuckerman and Scott Patterson in the Wall Street Journal report on the growing complexity facing hedge fund investors. For example the increasing use of “side pockets” for illquid investments makes fund accounting more difficult and increases the risk of conflicts of interest. Roger Ehrenberg at Information Arbitrage has a much deeper look at the issues involved with side pocket investments.
Jenny Anderson, who does a good job covering the world of hedge funds, in the New York Times reports on the re-ignition of the mega-fund start-up. One fallout from this trend is the growing difficulty for smaller funds ($15-$50 million) to raise enough capital to get out of the starting gate. It will be interesting to see how well these mega-funds perform in a higher interest rate environment.
Hedge funds apparently bring out some strong emotions. DealBook highlights a “adjective-laden diatribe” on the growing influence of hedge funds and the role regulators should play in reining them in. We can argue all day about the proper role hedge funds should play in the capital markets. The fact of the matter is that for now hedge funds remain a preferred destination for risk capital. Sometimes those bets pay off. Sometimes they don’t. It is more important that investors understand the environment in which these funds operate as opposed to getting hung up on the nuances of hedge fund regulation.