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US Carlyle reacts to threat posed by hedge funds by planning its own hedge launch

David Rubenstein, a founder of the US private equity giant The Carlyle Group, has warned that buy-out groups will become dinosaurs if they do not position themselves better in competition with hedge funds.

Speaking at a private equity conference in Frankfurt, Rubenstein said hedge funds had more money than private equity groups and were able to pay whatever it would take to hire the best private equity professionals.

Rubenstein is not alone in acknowledging that hedge funds were a threat to the core business of private equity. KKR founder Henry Kravis said earlier in the week that hedge funds were a risk, although he argued they did not have the right skills and experience to make a success of turning around or building private companies.

Carlyle's response to the risk, or at least part of it, appears to be entering the hedge fund fray itself. It plans to launch a hedge fund of funds as an initial step and then its own hedge fund later this year, according to reports.

Other private equity firms have adopted a similar response to the creeping threat from hedge funds. Texas Pacific Group, Blackstone and Bain have all launched their own funds or entered into joint ventures to deepen their interests or understanding of the asset class.

Some commentators foresee a gradual convergence of these two alternative asset classes, private equity and hedge funds, at least in some parts of the market. At the larger end, for example, the interests of the two sets of investors increasingly overlap in public-to-private deals or simply very large transactions.

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