Tuesday, February 21, 2006

Hedge funds enter the venture capital market

Bill Burnham

Hedge funds now have hundreds of billions of dollars under management and increasingly fewer public places to put them. As the buyout industry has already discovered, this over supply of capital is rapidly spilling over from the public world into the private world and causing all kinds of disruptions in the process. The supply of capital is such that the hedge funds are not likely to stop with buyouts, indeed it’s only a matter of time before they start making their presence felt in the venture capital market. Very quietly some initial beachheads have already been established by a number of hedge funds, such as DeShaw. More funds are rumored to be following in their footsteps and there are several examples of funds dipping their toes in the late stage end of the VC market a bit lately.

Julia Spicer of the Mid-Atlantic Venture Association talked about hedge funds competing with venture capitalists at last month’s MIT Enterprise Forum. I can’t say I am very enthusiastic about this. It seems like just one more way for hedge funds to get into trouble. For reasons unclear to me, hedge funds are not covered by the some regulations that apply to mutual funds.

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