KKR shutters hedge fund operation

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People Moves
03 Jun, 2014

KKR, the $102 billion private equity house, has shut down its $510 million equity-focused hedge fund and will return capital to external investors following a failure to attain scale at the business.

KKR also said it would re-focus its resources on other areas of its hedge fund business. The KKR Equity Strategy Fund was established in 2010 by Bob Howard, who previously headed up a proprietary trading group within Goldman Sachs. Reports have said a dozen or so traders will leave KKR although Howard will remain as a senior advisor at the buy-out group.

KKR retains interests in other hedge fund groups with a 24.9% stake in Nephila, a hedge fund focused on catastrophe and weather risk related investments. In 2012, KKR acquired Prisma, a fund of hedge funds with $10 billion in Assets under Management (AuM).  Private equity firms are seeking to diversify their business lines through the creation of hedge fund units. Both Carlyle Group and Blackstone, for example, have built impressive hedge fund businesses with Blackstone Alternative Asset Management now running approximately $58 billion.

There is a growing convergence between private equity and hedge funds with the latter increasingly imposing lock-ins more akin to private equity structures.  A report by J.P. Morgan’s prime brokerage business in March 2013 highlighted the main catalyst for the increase in these hybrid fund structures was the growing investment opportunities in less liquid distressed debt assets. 

Basel III and various national regulations are forcing banks to deleverage and restructure their balance sheets by devolving themselves of illiquid, non-core assets such as collateralised loan obligations and residential mortgage backed securities.  Managers scooping up these high-yield illiquid securities are also generating quality returns. Nonetheless, investor interest has remained static, said the J.P. Morgan study.

The illiquid nature of the underlying investments in these hybrid structures does cause trepidation among some allocators and the J.P. Morgan study said investors were not rushing into these vehicles. The same study added that hybrid vehicles were attracting capital from funds of hedge funds, family offices, foundations and endowments. While pension funds have expressed a slight interest in these products, many prefer to invest in hybrid funds through single-LP vehicles or funds of one. 

 

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KKRprivate equityCarlyle GroupBlackstoneJ.P. Morgan

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