Why Returns from Hedge Funds and Private Equity Lag Behind Venture Capital

By the way, if you think you can out-fox the market by hitching your wagon to the hedge fund and activist investor icons, think twice. So much has been written about activist hedge funds and their wealthy leaders – like Carl Icahn, William Ackman, and Barry Rosenstein – that you may have assumed these guys were winning big and that investors in their funds could feel confident of big gains.

Some of the activist hedge funds were big winners years ago, hence their founders’ personal fortunes. However, it looks like there may now be just too many dollars chasing not enough great ideas and so, of necessity when so many dollars flowed into their funds, some pretty questionable ideas received investment dollars too. As a result, these funds are not doing so great these days.

. . . Here’s more surprising disappointment. Private equity funds aren’t doing too well these days either. Based on a white paper published by the Center for Economic and Policy Research, private equity funds’ performance advantage relative to the S&P 500 has been shrinking in recent years.

. . . Again, the problem has become too much money chasing after too few good deals.

. . . Importantly, venture capital is the lifeblood of major, fundamental innovation, the key to substantive economic growth. Think about the big business success stories of the past dozen years – Microsoft, Alphabet, Facebook, etc. All were spawned by venture capital investment . . . and there are many more that have not yet gone public and are still operating on their own as well as ventures that were acquired by established companies who recognized and valued their growth potential. As a result, aggregate returns for the asset class have historically been outstanding, and there’s no sign that will change anytime soon.

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