Consultants and hedge fund-of-funds managers fear the convergence of private equity and hedge funds will result in neither class of managers succeeding at wringing alpha consistently from an unfamiliar asset class.
"It kind of scares me that hedge fund managers are so ready to make private equity investments without a lot of experience," said Susan McDermott, a consultant at Stratford Advisory Group Inc., Chicago.
"Private equity is tough enough for people with experience. Hedge funds are more trading-oriented than deal-oriented. True private equity managers love to do deals. That's what they're good at. The mindsets aren't mutually exclusive, but there really are few hedge fund managers that are deal-oriented."
Convergence also concerns Alan Dorsey, director of non-traditional investments at consultant CRA RogersCasey, Darien, Conn. "We don't like it because we look at hedge funds within a client's portfolio as marketable alternatives. We consider private equity unmarketable securities. You lose the liquidity of hedge funds if they are locked up in private equity securities and lose the longer lockup for private equity managers who need to hold securities … for more than three years in order to get the real value of the security. Investments that fall between the two asset classes usually don't offer the best of either world."