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News February 12, 2018 Issue

SEC Data Show Continued Growth of Private Funds

Private funds, whether hedge funds, private equity funds or most other types, continued to grow at a steady rate through the second quarter of 2017.

That’s according to the SEC Division of Investment Management’s analytics office, which recently released its 2017 report on private funds for 2017’s second quarter. The report covers data collected from Form PF and Form ADV filings from the third quarter of 2015 through the second quarter of 2017. Only SEC-registered advisers with at least $150 million in assets under management are required to file Form PF. Those with less than $150 million, are not required to file the form, but report general information about their private funds.

Why the increase in the number of private fund managers? One might posit a number of possible reasons, among them increased investor interest in alternative opportunities available through private funds, or the possibility that senior personnel in existing managers have wished to break off and open their own shops, said Morgan Lewis consultant attorney Steven Hansen. On the other hand, he noted, "It’s been a challenging time for some hedge fund managers because the market as a whole has been doing well, potentially making it more challenging to out-perform traditional equity investments."

Lowenstein Sandler partner Ben Kozinn noted that private equity funds and venture capital funds appear to have experienced the most growth, while hedge funds remained "essentially flat."

"None of this is terribly surprising," he said. "The investor appetite for private equity and venture capital remains strong because they have shown the ability to generate positive returns across market cycles." In addition, he said, private equity fund returns have less correlation to the broader stock market because their investments may be in place five to 10 years before their returns are measured."

Some key points from the report:

  • Aggregate number of private funds rose. There were 25,084 private funds in the third quarter of 2015, while there were 28,630 private funds in the second quarter of 2017.
  • More private equity funds than hedge funds, although not always. The reports shows 10,335 private equity funds in the second quarter of 2017, compared to 9,088 hedge funds for that same period. In the second quarter of 2015, however, that hierarchy was reversed: there were 8,250 private equity funds, but 656 more hedge funds – 8,906, to be exact. After 2015’s second quarter, every quarter showed private equity funds taking the lead.
  • Number of advisers managing private funds rose. This might be expected, since there are more funds. There were 2,720 advisers managing private funds in the third quarter of 2015, and 2,895 doing so in the second quarter of 2017. It was not a consistently steady rise, however. The number of advisers declined a bit in 2016’s second quarter, from 2,831 the quarter before to 2,826, and then declined again in that year’s third quarter, to 2,822, before resuming its growth rate at 2,894 in the fourth quarter of 2016.
  • More investments in derivatives. The aggregate dollar value of private fund investments in derivatives rose by more than 10 percent between the third quarter of 2015 and the second quarter of 2017. There were $9.5 billion in derivative investments in 2015’s third quarter, and $10.5 billion in such investments in 2017’s second quarter, according to the report. By private fund type during this same time period, hedge funds saw their aggregate derivative value increase from $9.3 billion to $10.3 billion, while qualifying hedge funds saw their aggregate derivative value increase from $8.1 billion to $8.9 billion. Private equity funds, on the other hand, apparently pared back their derivatives investments, which dropped from $73 million in the third quarter of 2015 to $38 million in the second quarter of 2017. Real estate funds’ investments in derivatives were modest in 2015’s third quarter, just $10 million, but they increased it to $16 million by the time the second quarter of 2017 ended.