Alternatives briefs: Private equity fundraising plummets to 3-year low

Private equity funds raised the lowest amount of capital since the first quarter of 2005, with 117 funds raising $82.3 billion in the third quarter, down from 212 funds raising $170.9 billion in the second quarter and the 213 funds that raised $118.7 billion a year earlier, according to new data from Private Equity Intelligence, a data research firm.

Private equity funds in the first quarter of 2005 raised $64.8 billion in 159 funds.

Still, there are currently 1,594 funds attempting to raise a total of $928 billion, up from January when there were 1,304 funds raising $705 billion.

U.S.-based funds raised most of the capital in the third quarter, with 61 funds closing on $57.9 billion. For the 31 funds based in Europe, $11.9 billion was raised. For the 25 funds based in Asia and the rest of the world, a total of $12.5 billion was raised.

Funds are taking an average of 14.2 months to close, up from 12 months in 2007 and 11.1 months in 2006, according to the London-based research group.

TORONTO — Northwater Capital Management Inc. has warned that the performance of two of its hedge funds of funds may be negatively affected by an investment in an allegedly fraudulent company by a hedge fund used in Northwater's underlying portfolios.

The FBI in late September launched a fraud investigation into Minnetonka, Minn.-based Petters Group Worldwide and its founder, Thomas Petters, according to a source with knowledge of the situation who asked for anonymity.

The investigation centers on an allegedly fictitious electronics distribution network that the Petters Group used as collateral for loans it had from hedge funds.

Charges have not been filed against Mr. Petters or other employees of Petters Group Worldwide, according to a search of federal court filings. The FBI is continuing to investigate the fraud charges, confirmed D.K. Wilson, a spokesman for the FBI's Minneapolis office.

In a statement on Sept. 30, Northwater, an institutional hedge fund-of-funds manager, said two of its three Toronto Stock Exchange-listed hedge funds of funds were affected. As of Aug. 31, exposure to the unnamed hedge fund totaled 4.3% of the assets of the Northwater Market-Neutral Trust and 2.5% for the Northwater Five-Year Market-Neutral Trust. As of June 30, assets in the Northwater Market-Neutral Trust totaled C$45 million (US$43 million), while the Northwater Five-Year Market-Neutral Trust had C$62 million, according to each fund's second-quarter report.

Northwater officials said in the statement that they will write down the value of affected investments to zero when determining the Sept. 30 net assets of the two funds.

Stephen M. Foote, Northwater vice president, was unavailable for comment.

Hedge fund and fund-of-funds returns continued to outperform major equity market indexes for reporting periods ended Sept. 30, although they badly trailed fixed-income returns, according to index performance numbers released by Hedge Fund Research and Eurekahedge released.

The HFRI Hedge Fund Weighted Composite index returned -4.68% in September and -9.41% year-to-date Sept. 30. The estimated performance of the Eurekahedge Hedge Fund index was -2.99% in September and -6.21% year to date.

HFR reported that September represented the fourth consecutive month of negative returns for hedge funds. Spokesman Chris Sullivan noted that September losses created the second worst monthly return on record since HFR began tracking performance in 1990, bested only by the -8.7% drop of the HFRI Fund Composite index in August 1998.

Hedge funds of funds returned -4.95% for September, according to the HFRI Fund of Funds Composite index, and -11.03% for the first nine months of 2008. The Eurekahedge Fund of Funds index returned an estimated -4.12% in September and -10.07% year to date.

By comparison, the S&P 500 index returned -9.08% for the month and -20.57% year-to-date and the MSCI World index return was -9.26% in September and -32.47% for the nine months. Performance of the Lehman Brothers U.S. Aggregate Bond index was negative, but much less than equity and hedge fund indexes with a -1.64% return in September and -0.02% for the nine months ended Sept. 30.