Can a hedge fund directly do private equity deals or do they have to invest in a PE firm?
sorry if this is a dumb question
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I'm going to go with yes. http://www.bloomberg.com/news/articles/2007-02-25/hedge-funds-jump-into… It basically just has to be outlined in the fund what can and cannot be invested in so that way investors will know what they are putting their money towards.
they "can" but its not what their LPs signed up for.
so more like you can do it, but not many funds do so make sure your LPs know ahead of time to make sure you don't majorly piss them off?
The term HF is often misused/misunderstood and should be used to describe the investment objective of a specific investment vehicle (a pool of capital). A manager (consisting of a team of people) can choose to manage however many investment vehicles in as many investment strategies as it chooses. When someone use the term "HF manager" it suggests that the team is primarily in the business of managing vehicles that qualify as HF strategies (non-traditional investment strategies, such as L/S credit/debt, special sitch/distressed, activism, etc. etc.). A larger manager such as Blackstone, for example, obviously has a PE business and also manages many pockets of capital that'd qualify as HF strategies.
so basically HF is a vehicle and PE is a strategy?
HF and PE should both technically be used to describe the investment strategy of a pool of capital. Take Vista Equity for example. They're mostly known in the market as a "PE investor". It has raised 5 buyout funds and in the market raising a 6th (you can find this by Googling). However, Vista also invests in credit, albeit not a main strategy of theirs. Many large, traditional PE firms are now set up this way (Providence, Bain, THL, Carlyle, BX, KKR, list goes on and on). Using this same analogy, you can see that the manager is simply a team of people and PE/HF are just used to describe what the pools of capital they manage. The manager will have a reputation for "PE" or "HF" based on the history what they focus on and overall AUM mix on which strategies they focus on.
so it's a very similar if not identical legal structure when setting a fund up?
I don't quite understand this question. There are many legal/structural differences b/w a HF vehicle and a PE vehicle. One main difference is that PE vehicles typically lock up investors' money with a 5-year reinvestment life + next 5 years of wind-down and return of capital. Assets in the vehicle are typically valued quarterly and is a part of the monitoring process. Many HF vehicles have daily mark-to-market and investors have immediate (sometimes limited) redemption rights.
okay thanks. any recommendations on books for the technical aspects of setting up a HF or PE fund? I know there's some recommendations from WSO but they weren't exactly what I was looking for
Okay, let's separate the legal structure from the investment strategy.
Legal structure -- MidtownParkAve sums it up pretty well. Essentially hedge funds are evergreen limited partnerships with redemption rights while PE funds have finite lives and little to no redemption rights.
Investment strategy -- the term "hedge fund" covers a very wide range of potential investment strategies, but ultimately I would say the defining characteristics versus "private equity" are:
i) Investment horizon -- PE firms have longer investment holding periods than hedge funds. ii) Portfolio liquidity -- for the most part, HFs tend to invest in liquid, publicly traded securities while PE firms often invest in private companies (or invest in public companies and take them private). iii) Size/control of investments -- PE firms generally exercise control or at least substantial influence over their investments (by owning very portions of companies) while hedge funds usually have limited ability to directly assert control or influence.
These three things really go hand in hand: If you are taking large control stakes with a view to improving company operations to create value, your liquidity will be limited and your holding period will be long.
So from a strategy perspective, yes, a hedge fund can certainly make PE-"style" investments provided it is not restricted in doing so by its governing documents (and many large hedge funds do that). However, that creates a big problem when your investors have the ability to pull their money monthly/quarterly and your investments are large and illiquid...
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