Convergence and Diversity in the Hedge Fund and Private Equity Industry

Abstract

Abstract This chapter identifies differences in hedge fund and private equity strategies in terms of investments, strategies, and fundamental terms. These underlying structural differences have implications for the type of investor attracted to each investment style. Previously, investment decisions could be made on a set of trade-offs, but increased competition in the hedge fund industry is now the main factor driving the type of fund operating and competing in investment markets. This chapter describes the terms and conditions which address fund formation and operation, fees and expenses, profit sharing and distributions, as well as corporate governance. No matter how appealing the prospects of hedge fund and private equity convergence, there are significant concerns: can both types of fund combine different investment styles without affecting the level of returns?; can the transition toward financial convergence be blocked if hedge fund investors object to valuations based on subjective, and not actual, market trading?;can ‘side pockets’ in a hedge fund be isolated from the costs of accounting for the two streams of capital?