Hedge Funds and Their Private Equity Positions

During the heady days before the credit crisis, hedge funds had expanded into private equity deals.  During the crisis, these illiquid investments had been placed in side pockets.  Essentially, investors cannot retrieve their capital from the fund.  Side pockets are used when assets cannot be valued accurately due to the markets being frozen.  If investors are allowed to pull money from the fund, then the liquid assets are sold first.  The remaining investors are exposed to the full risk of the hard-to-sell investment such as private equity.

Hedge funds may be looking to sell up to $55 billion in holdings.  They need to unload them in order to raise money to open other funds.  Investors are starting to pour money into hedge funds but are wary of investing money with managers that have side pockets.  Private equity managers and specialty secondary market investors are the most active buyers of these positions from hedge funds.

The source for this post is an article in the magazine Pensions & Investments.