Crossover Hedge Funds, Friend or Foe?
A crossover fund allows a single investment to pursue both the illiquidity premium and the market premium–two premiums considered to have a low correlation. And, as we all know, low correlation helps to reduce volatility, in terms of standard deviation of returns.
According to this article we found written by Mark Anson back in 2001, venture capital grew from $2 billion in 1991 to $48 billion in 2000. To put it into today’s perspective, Conor Moore at KPMG wrote an article that says venture capital reached $347 billion in 2021–which “doubled from 2000”.
In a nutshell, crossover funds that combine public equity and private equity have been around for a couple of decades–that is, if you are an institutional investor with a long timeframe to wait out the potentially superior returns of the illiquid portion of your portfolio.
Most recently, crossover funds have become popular with hedge funds, primarily combining a long/short strategy on the public side and private equity on the private side. In fact, according to this article written by PitchBook titled “hedge funds are leading the race to stake startups”, crossover strategies peaked in 2021. The article kinda nails it, by warning that the 2021 frenzy could lead to pain for startups if the valuation environment changes–which it did in 2022.
Today, many of the major venture capital firms are offering a crossover strategy, perhaps motivated by a company they own going public, or for some other reason. But they did not do so well in 2022, as this article by Juliet Chung at WSJ points out that even though “crossover hedge funds lost big in 2022, they are still launching in 2023”. Even Cathie Wood at Ark Investing has recently thrown her hat in the ring with the launch of a crossover strategy within a closed-end interval fund format.
Like any investment strategy, the key is to understand the appropriate allocation according to a given risk profile. This is what we do in the multi-alternative closed-end fund we sub advise with less than a 20% allocation to our crossover strategy combining long/short and private equity investments.
We believe crossover investing will continue to rise in popularity for many reasons, including giving investors an easier way to access private equity and, at the same time, overcome the whole challenge of managing capital calls.
Want to keep up with all the different investment strategies out there? We’ve created a strategy database. If you’re a financial professional, you can get it here. Because at the end of the day, it’s the strategy you use that matters most.
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