The asset class that won wasn't better. It just had better PR
Where can you make money based on performance, not politics? “Hedge funds of course” I told myself in 2006. So why today does private equity manage ~3x the capital as hedge funds?
When I started my career in the ‘90s private equity had a reputation for hostile takeovers, asset stripping and mass layoffs; by ‘06 the industry had gained legitimacy . . . somewhat. The last deal I worked on was the $14B Hertz LBO famous for the headline “Buy It, Strip It, Then Flip It.”
One could argue “The Man Who Broke the Bank of England” gave the world a glimpse into the hedge fund industry in the ‘90s, profiting $1 billion from a single trade. Hedge funds were still secretive, though; you’d hear stories of hedgies like Stan Druckenmiller and Paul Tudor Jones (boxing champ by the way) and want to know more.
When I left Deutsche Bank in 2006 to go to the buyside, the “alternatives” were private equity or hedge funds (see what I did there?). At the time both asset classes managed similar amounts of capital and felt boutiquey. Ken Griffin and Stephen Schwarzman were not yet on the Forbes rich list leader board.
I bought the hedge fund hype. I wanted the quick win
My thinking? Hedge funds would be less political and more performance-based, offer a quicker payout. Private equity felt like an extension of investment banking . . . same long hours, same people, just a different side of the same business. Not only that but also you had to wait a decade to determine success (and get that payout). I wanted a change: faster feedback, less structure, fewer layers between performance and paycheck.
The race started evenly
In the mid-1990s up until the GFC, hedge funds and private equity managed roughly the same amount of capital reaching ~$2 trillion for each asset class. Both alternative investment strategies, targeting lofty returns, growing, and competing for institutional capital. Back then, regular people could not invest with the best!
One year in, I felt like I made the right choice . . . hedge funds were on a tear; the “quant quake” in 2007 felt like a blip . . .
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