We are about to see a seismic shift in asset allocation towards hedge funds and private equity. Some supportive data quickly arrived from Private Equity Intelligence suggesting a cool $85bn of institutional money will shift to hedge funds over the next 12 to 18 months.
Preqin said while high net worth individuals were the main investors in hedge funds towards the end of last century, pension plans, many of which are in deficit, are increasingly reconsidering their investment policies and diversifying into alternative assets.
The hedge fund industry has grown rapidly in recent years, helped by its ability to make money even in falling markets.
Hedge funds are private, largely unregulated pools of capital whose managers can buy or sell any assets and participate substantially in profits from money invested. Private-equity firms acquire part or all of a company using debt to finance about two-thirds of the purchase price. They usually hold investments for three years or more while they seek to improve profits. They then try to sell to other companies or investors through an initial public offering.
According to Chicago-based Hedge Fund Research Inc, hedge funds worldwide manage $1.57 trillion, more than double the amount in 2001. Since 2001, the number of hedge funds has more than doubled to about 9,600 according to the research firm.