By Jamie McGeever
ORLANDO, Fla., – Facing the prospect of poor returns in traditional markets as interest rates rise, and with a natural desire for minimalist oversight, hedge funds and family offices are sharpening their focus on private markets and alternative investments.
The appetite among thousands of attendees at a trifecta of hedge fund and alternative asset conferences in Miami at the end of January to find new avenues for ‘generating alpha’ was palpable.
But as these sophisticated investors plow more cash into the shadowier parts of the investment universe, regulators are sharpening their antennae to the potential threat this poses to financial stability and even systemic risk.
The US private equity and debt markets were worth a record $4.1 trillion at the end of June 2021, according to industry data provider Preqin, comprising $3.25 trillion of equity and $826 billion of debt. That’s up 44 percent from pre-Covid levels in December 2019.
The global total exceeds $6 trillion, and a broader measure of worldwide private market investments is nudging $10 trillion, Preqin data shows.
According to one Securities and Exchange Commission official, the total US private investment universe including hedge funds, venture capital and other markets has more than doubled to $11 trillion since 2013.
The S&P 500 may have returned a juicy 28 percent last year, but that anomaly will not be repeated this year with interest rates about to rise. The BofAUS Treasuries index fell 1.9 percent in January, its worst start to a year since 2009, and will also remain fragile as borrowing costs rise.
Private markets offer a potential escape.
