After three years of uninspiring performance, buyout legend KKR & Co. L.P. (NYSE:KKR) is pulling the plug on its equity investing hedge fund, the Wall Street Journal is reporting.


KKR liquidated equities strategy group due to lack of scale

KKR Equities Strategies was liquidated last week after failing to attract significant outside assets and delivering a yearly annualized performance near 5% after three years in existence, the report said, significantly outperforming the stock market and other hedge funds

The fund had $500 million in assets under management, mostly assets provided by KKR employees. The fund had less than 20 non-KKR investors, the report said.. A spokesperson said the hedge fund’s “lack of scale” was the deciding factor in closing the fund. While assets under management in hedge funds have been rising, the lion’s share of new investments have been procured by the larger hedge funds.  Funds with assets under $1 billion have experienced difficulty raising assets.

Dodd Frank encouraged traders to migrate from banks to hedge funds

Approximately three years ago, as Dodd Frank regulations were making it difficult for bank proprietary traders, a small group of mostly Goldman Sachs traders left the bank to start the KKR & Co. L.P. (NYSE:KKR) division in equities. Private funds such as those offered by KKR are much less regulated than banks to manage their own money. The fund’s traders are set to leave next week with former Goldman proprietary trader Bob Howard, who ran the KKR fund, remaining with KKR on a part time basis as a “senior advisor.”

The closing of the KKR fund also is a tale of how private equity funds are working to diversify their business lines. There is a significant cross marketing benefit as investors in private equity funds are also known to invest in equity funds. The move into a different type of fund also smoothed the somewhat patchy nature of private equity buyout firm, which can go through long periods of drought before finding the appropriate market environment for buyouts. For KKR, the addition of an equity fund offered a new method to generate consistent income uncorrelated to debt fueled buyouts.

Peer comparisons show diversification among major buyout firms

When compared to its publicly traded peers, KKR & Co. L.P. (NYSE:KKR) is the most dependent on buyouts deals and the like, which represents nearly $61 billion of the $102 billion the fund managers. By contrast, less than 25 percent of The Blackstone Group L.P. (NYSE:BX)’s $272 billion is in private equity. The firm also manages significant real estate and private equity fund businesses. Apollo Global Management credit fund has grown to be twice the size of its buyout group, for example.