Prometheus 6

The forces that created these private investment vehicles — large institutional investors with long-term plans to diversify away from simple stocks and bonds — are likely to continue pouring billions into alternative investments, a category that includes hedge funds and private equity firms. And the effort to crimp the industry’s tax advantages has faltered — at least for now.

During the last two weeks of July and the first week of August, amid a widespread market meltdown, Citigroup surveyed close to 50 pension managers from the United States and Europe who collectively manage over $1 trillion in assets. 

For Private Investment, the Party Isn’t Over
By JENNY ANDERSON

Just weeks ago, the raucous hedge fund and private equity party of recent years seemed to be fading.

Subprime woes rattled the stock and credit markets through late summer. Hedge funds were imploding almost daily, squeezed by banks calling in loans and investors demanding their money back. Private equity deals fell apart as the cost of borrowing rose.

Some of the competitive advantages of these firms, including a favorable tax structure, were also under intense scrutiny in Congress — and even from within its ranks.

“A tax loophole the size of a Mack truck is right now generating unwarranted and unfair windfalls to a privileged group of money managers,” Leo J. Hindery Jr., a private equity executive, said last month. “To no one’s surprise, these individuals are driving right through this $12-billion-a-year hole.”

The grim mood was captured by Donald H. Putnam, founder and managing partner of Grail Partners, a merchant bank: “If a rising tide lifts all boats, a sinking ship sinks all ships. There will be many more losers than winners when this is through.”

But perhaps the hats, balloons and streamers should not be put away just yet.

The forces that created these private investment vehicles — large institutional investors with long-term plans to diversify away from simple stocks and bonds — are likely to continue pouring billions into alternative investments, a category that includes hedge funds and private equity firms. And the effort to crimp the industry’s tax advantages has faltered — at least for now.

During the last two weeks of July and the first week of August, amid a widespread market meltdown, Citigroup surveyed close to 50 pension managers from the United States and Europe who collectively manage over $1 trillion in assets.

The survey showed they would, on average, raise their allocation in alternative investments to nearly 20 percent by 2010 from 14 percent today. In all, that would mean another $1.2 trillion flowing into alternatives over the next two years.