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carve out portions of their assets and treat them similarly to private equity
investments. These assets are called side-pocket allocations.
Leverage and Private Equity Investments
Like hedge funds, private equity funds can borrow money to buy assets in
excess of their capital. Leveraged buyout funds and venture capital funds
may carry the debt on the balance sheet of the companies they own.
Leverage in private equity is lower than the leverage in the most leveraged
hedge funds.
Private Equity and Absolute Returns
Many hedge funds seek returns that are relatively uncorrelated to stock
and bond returns. They don't try to keep up with the stock market when
returns are very high on stocks. Likewise, they seek to avoid losing money
in periods when stock returns are negative. These hedge funds are seeking
absolute returns, to contrast the traditional portfolio manager that bench-
marks return relative to a market index.
Most private equity strategies are not absolute return strategies.
Venture capital returns, for example, are highly correlated with Nasdaq
returns because the venture capital funds and the Nasdaq share a con-
centration of investment in technology companies.
Private Equity and Liquidity
Private equity funds generally offer little or no liquidity to investors. As men-
tioned earlier, venture capital funds generally don't charge incentive fees un-
til assets are liquidated because it is difficult to defend mark-to-market
valuations of their assets. For the same reason, venture capital funds gener-
ally don't redeem their investments until assets are liquidated to avoid having
to defend a mark-to-market net asset value. As a practical matter, the venture
capital fund may not have cash available to redeem investments and no
means to readily generate cash because it carries assets with limited mar-
ketability.
CONTRASTING COMMODITY POOLS WITH
HEDGE FUNDS
It is particularly vexing to distinguish commodity pools from hedge funds.
In fact, any hedge fund that trades futures or commodities only minimally
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HEDGE FUND COURSE
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