Bigger doesn’t always mean better, but in the case of hedge funds, it might, as large and well-known hedge funds are considering taking cash and business from smaller and newer investors through initial public offerings, according to The Wall Street Journal.
Firms such as Fortress Investment Group, Farallon Capital Management, D.E. Shaw and Citadel Investment Group all manage assets between $13 billion and $31 billion each. All of the firms had less than $10 billion three years ago.
One hundred of the largest hedge funds control about 70% of the money in the hedge fund industry, up from 50% at the end of 2003, according to Morgan Stanley’s prime-brokerage unit.
As more hedge funds think about going public, they are poaching employees from smaller firms and taking initiatives to turn themselves into firms that can rival Wall Street investment banks.
“Larger, longer-established funds are increasingly capturing capital—squeezing smaller funds and making it difficult for new start-ups to raise capital,” said Robert Discolo, managing director at AIG Global Investment Group.
Even up to five years ago, large hedge funds were not that far ahead in terms of attracting more money than smaller competitors. Investors are now seeking out larger funds because they often have advantages such as lower trading fees and financing costs and better risk management. The funds also provide investors with a wide range of trading strategies.
Another glitch for small hedge funds is the recent proposed ruling by the Securities and Exchange Commission that requires to investors to have a minimum of $2.5 million in investable assets, as opposed to the current $1million. This could potentially reduce the number of investors that might be interested in a small fund.
However, all is not gloom and doom for small hedge funds. The generous fees charged allow even small funds to do well if their performance is good. While raising money is more difficult, there are more investors still looking to invest in hedge funds then there was five years ago.
The staff of Money Management Executive ("MME") has prepared these capsule summaries based on reports published by the news sources to which they are attributed. Those news sources are not associated with MME, and have not prepared, sponsored, endorsed, or approved these summaries.