Hedge Fund Returns Suffer in 2010 Amid Europe Crisis

(July 14, 2010) — Hedge fund returns have continued to drop in 2010 as concerns that the sovereign debt crisis in Europe may thwart a global economic recovery persist.

The decline reflects recent expectations by Byron Wien, vice chairman of Blackstone Group LP’s advisory services division, who said during the Monaco-based GAIM International hedge fund conference that hedge fund returns may halve as firms seek to protect investors’ capital.

Hedge funds have been struggling this year amid signs of a global economic downturn, following 2009’s strong year, when hedge funds returned an average 20%. Hedge funds lost an average of 0.5% in June after losing 2.6% in May, with the overall sector posting a negative 0.02% for the current year, according to the Eurekahedge Hedge Fund Index, which measures the performance of more than 2,000 funds worldwide.

In related news, a recent study by Northern Trust Global Advisors (NTGA) shows institutional investment managers have moderated their expectations for global growth. The study revealed institutional investment managers are less optimistic about near-term global growth and more concerned that the Euro debt crisis will continue to affect markets for at least another six months.

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“I think the survey shows managers are worried about the global economy in general, since the US economy is linked to the global economy” said Northern Trust’s Janet Yang to ai5000.

The second-quarter survey reflected a significant shift in optimism from the prior four quarters, with more than two-thirds of respondents expecting sovereign debt concerns in Portugal, Italy, Ireland, Greece and Spain to negatively impact global markets. Seventy-five percent of those surveyed anticipate that global growth will remain the same or decelerate.

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742

(July 14, 2010) — The Florida State Board of Administration, which oversees a total of $138.4 billion, including the $112.2 billion Florida Retirement System, has purchased a nearly 10% stake in Lexington Partners Inc. with a $41.25 million investment on June 18.

“As far as private equity goes, we’re conservative – we’re behind the curve in terms of commitments to private equity, but it’s apparently serving us well,” SBA’s Dennis MacKee told ai5000.

Despite such transactions falling in number following the downturn of 2008, SBA’s investment mirrors similar actions by a number of limited partners, such as pensions and sovereign wealth funds, that purchased stakes in private equity firms’ management companies during the buyout boom. The deal highlights the SBA board’s first ownership stake in a private equity manager or any investment management company.

SBA has been working on the deal since 2008 and has been making investment commitments with New York-based Lexington since 1998. The board currently has $2.1 billion invested in private equity with Lexington, — consisting of $1.5 billion as a co-investor and $600 million in Lexington funds 4, 5, 6 and 7.

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Lexington plans to use the sale proceeds for expansion, which includes opening a new office in Hong Kong. Evercore Partners, the board’s consultant on investing in general partnership management companies, assisted on the deal.

Separately, early last month, the Tallahassee-based pubic pension revealed aims to increase its exposure to alternative investments. For the first time, the Florida Retirement System (FRS) said it would move into hedge funds, reflecting the fund’s move toward a greater exposure to alternative investments. “We’re trying to find a way to maintain and improve our return while re-selecting the type of risk we’re taking,” SBA spokesperson MacKee told ai5000.

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742