Wednesday, January 25, 2006

the hedge fund bubble

So it may come as no suprise to most of you that the now hyper competitive hedge fund market is in my personal view giving off some mildly distrubing signals. I find it far easier to write about my reactions to things that i actually experience first hand, rather than commentary second or third - this is one of those. For some time now, the hedge fund bobble heads have been tearing around the private equity markets directly competing with the banks to pony up the debt side of buy-outs and such. A departure from what i would typically define a hedge funds investment thesis to be - but not suprising given the inequality of capital supply and demand. The banks ofcourse cry foul - claiming that the hedge fund approach to debt issuance is cavalier, adding risk parameters to the market that are 'unhealthy' and so on. I have been working on one such transaction that involves hedge fund debt. They are very agressive. It got me thinking. If one assumes that the risk profile of said debt market has changed as a result of hedge fund incursions, and hedge funds are still feeling the pinch on deployment of capital, where else will they look next? thats right, Equity. How far can they go? can they venture? My dealings would not really expose me to this type of activity but is it a reasonable suposition that entrepreneurs should be prospecting these hedge funds? are the traditional VCs seeing competition? What ever the case, and or the possibility, the hedge fund sheep has strayed from its flock and it is only a matter of time before the wolves come for dinner.

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