Financial Times- Hedge funds and private equity have one big thing in common. Both charge whopping fees – typically 2 per cent of assets under management (AUM) and 20 per cent of investment profits.Otherwise, the differences are huge.
Private equity is a heavily geared, “long-only†investment in illiquid assets (whole companies), with high levels of control and a multi-year time horizon. Hedge funds, by contrast, typically invest in liquid securities, with no control. They have the flexibility to take both long and short positions and their performance, because it is more transparent, is judged almost constantly by investors.
So which of the two asset classes is more valuable when a management company goes public? The obvious answer is private equity.
First, assets are tied up long-term. Kohlberg Kravis Roberts, which plans an initial public offering, says 73 per cent of its assets are committed for as much as 18 years. While KKR is highly unlikely to hold any investment for that long, it does give huge flexibility to ride out tough times. And it provides a steady stream of cash from the 2 per cent management fee – alongside the bigger and more volatile 20 per cent share of investment gains. Private equity funds also juice fees with a charge for each deal they do and sometimes a cut for syndicating equity to third-party investors. That can take underlying management fees closer to 3 per cent.
