Hedge Fund Pool Drying Up

Dealbook is reporting that, at the current rate of hedge fund closures, 7% of the hedge fund industry will have closed by year’s end. Hedge funds are supposed to make money no matter which way the market goes, but not when they don’t know which way its going, according to Dealbook contributor Louise Story. Hedge fund models are failing because the markets are “too unpredictable,” she wrote.

This news is apparently lost on Financial Technologies Forum LLC, who recently invited me to a half-day course on “Understanding Hedge Funds.” I’m not sure the conference planners understand hedge funds that well themselves, since their invite opens by saying:

Hedge Funds remain the fastest growing, dynamic and most intriguing segment of the market.

Oops. But that aside, what does a diminished hedge fund industry mean for private equity? Surely its going to make less of an impact than the bank consolidation we’re seeing, but hedge funds make up a decent chunk of senior debt holders in LBOs, too. One more nail in the access to capital coffin.

I guess the upside is this: Speaking in gross generalizations, deals getting done today are using around half equity, with some mezz and some senior debt. If a company that’s capitalized that conservatively somehow goes under, (A) the PE firm just lost a lot of money, but (B) there will likely be less parties fighting for control of the company on the other side.