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Hedge fund, private equity sectors seen at a peak

Date: Friday, September 28, 2007
Author: Reuters.com

LONDON, Sept 27 (Reuters) - The hedge fund and private equity industries have reached a near-term peak in their cycles after years of rampant growth, speakers at a Reuters Forum said on Thursday.

"Private equity and hedge funds both have cycles, and I think we're now at the peak of the cycle for the time being," said Anthony Bolton, a star fund manager at Fidelity International.

"The flow of money has encouraged some mediocre people. They will all be wiped out in the current environment, which will allow the good people to go on."

The $2 trillion hedge fund industry has seen huge inflows from institutions and wealthy individuals in recent years, thanks to its ability to make money in all market conditions.

But many funds were hit hard by equity and credit market turmoil this summer, prompted by fears that a surge in defaults in U.S. subprime mortgages would spark a wider financial crisis, and leading to worries about a wave of redemptions by investors.

"There's bound to be some backlash," said Helena Morrissey, chief executive of Newton Investment Management. "A huge amount of money has gone into some assets, and people will question that."

Large-scale corporate buyouts became increasingly common in recent years thanks to a supply of cheap debt and strong flows into private equity funds. But Charles Sherwood, a partner at private equity firm Permira [PERM.UL], noted that big buyouts had dried up during the credit crisis.

"As the credit market currently stands, the large leveraged buyout market in the Western world does not exist today," he said, pointing out that the business model depends on the use of leverage, or heavy borrowing, to "magnify" returns.

"That magnifying glass today is broken. (However), I don't think there is huge pressure. Private equity firms can sustain a period of reduced activity."

At least some hedge funds also appear to be riding out the tougher times. Christopher Fawcett, CEO and founding partner of fund of hedge funds firm Fauchier Partners, said there had not been the levels of redemptions he hoped for in certain funds.

"We were hoping for redemptions so we could put money in," he said. "There have been pockets of redemptions in certain strategies and certain hedge funds, but not across the industry."