Unhappy hunting grounds

Reuters

This season's must-have label

BESIDES a shared taste for funny names and fancy fees, it has usually been easy to distinguish hedge funds from private-equity firms. Most hedge funds hunted in liquid markets, where they could jump in and out like cats and there was no need to tie investors in for long periods. By contrast, the strength of private-equity firms lies in corporate surgery. That takes longer, so they expect investors to wait years before they can get money out.

Over the past three years, hedge-fund returns have paled against those of buy-out firms and even against stodgier stockmarket benchmarks. According to Huw van Steenis, of Morgan Stanley, more net new money went into private equity than into hedge funds last year. That has pushed hedge-fund managers into less liquid markets, such as mid-cap stocks. As a result, they sometimes encroach on territory private-equity firms consider their own. When both groups find themselves stalking the same prey, tempers can flare.

That has happened at Tommy Hilfiger, an American fashion brand which appeals to both preppy college kids and teenage gangs. Hilfiger is being fought over by a hedge fund and a private-equity group. In December it agreed to a sale for about $1.6 billion to Apax Partners, a London buy-out firm. Bankers from J.P. Morgan gave an opinion that the price was fair. “Bottom line, it was a thorough and fair process,” said Mario Baeza, a Hilfiger director.

Not so, said Sowood Capital, a hedge fund with a 6.3% stake in Hilfiger, in a filing to the Securities and Exchange Commission on January 23rd. It said it would vote against the takeover. “The public shareholders have, in essence, 'paid' for the turnaround of [Hilfiger] and now Apax stands to reap the benefits,” it complained.

More such spats seem likely. Sought-after hedge funds like Sowood, set up by two former administrators of Harvard University's endowment, can convince investors to commit their money for at least two years, giving them room to trade less liquid securities. The number of funds with long lock-ins is likely to increase. February 1st marked the deadline for hedge-fund managers to register with America's Securities and Exchange Commission, unless their lock-ins exceed two years. Anyone who could escape the burden of registration by extending the lock-in period was bound to try, giving him more scope to behave like a buy-out group.

The chase for similar assets need not create friction. When Canada's Fairmont Hotels went on sale last year, much of the credit went to the not-so-gentle persuasion of Carl Icahn, a veteran investor. On January 30th a partnership involving Colony Capital, a private-equity fund, agreed to pay $3.9 billion to take it over.

Whether hedge funds and private-equity firms co-operate or fight, the line between them is blurring. That's fine, but with more investors hunting on the same ground, returns might be trampled. If so, it will be even harder to justify the fees.