Dmitry Balyasny, head of one of the largest US hedge funds, has said he expects an increasing number of his peers to begin investing in private companies, despite fears of overheating in the crowded market.
All large hedge funds will eventually invest in start-ups because the divisions between private and public markets are becoming irrelevant, Balyasny told the Financial Times.
“Markets are pretty efficient, and one of the sources of inefficiency is when you have artificial lines,” said the chief of the $13bn Balyasny Asset Management. “The line between public and private is an artificial line that creates different types of investors, and that creates opportunity.”
His comments come as hedge funds, typically known for investments in publicly traded assets, have started to pour resources into private companies in an effort to fire up returns. Those entering this space include some of the most high-profile names in the industry, such as Tiger Global Management and Coatue Management.
Balyasny recently hired a team of 10 people to lead a new unit, BAM Elevate, that manages 3 per cent of assets in its Atlas hedge funds. Jamie McGurk, a former partner at Coatue, and JP Van Arsdale, formerly at Glade Brook Capital Partners, joined last year to lead the team.
It also aims to raise between $250mn and $500mn for a separate fund led by the Elevate team, according to investors. The firm declined to comment on fundraising.
Elevate made two private investments in January, including a $50mn deal it led in the retail services start-up Leap.
The team has also quietly built stakes in some of the largest private companies, such as the $38bn software group Databricks and $45.6bn fintech business Klarna.
Elevate does not plan to make investments in cryptocurrency tokens, an area that has attracted interest from some other hedge funds, according to people familiar with the firm’s thinking.
Few of Balyasny’s largest peers, including Citadel and Millennium Management, have made significant investments in private tech companies. The investments can sometimes be tough to sell, making them difficult to manage if market conditions worsen.
But Balyasny said the prospect of rising interest rates and the recent downturn in high-priced technology stocks had not damped his enthusiasm for private tech investing. He said he hoped the strategy would pay dividends for the next two decades.
“I much prefer expanding when things are more difficult in a strategy,” he added. “You have a better chance to invest at better valuations.”
Some venture capitalists have balked at hedge funds and other non-traditional investors moving into private investments, arguing they tend to pay inflated prices to win deals and quickly cut losses when companies falter.
Hedge funds, in turn, have moved deeper into the ballooning private markets as outperformance has become more elusive in public stock markets.
Multi-manager firms such as Balyasny typically aim to make steady returns that bear little relation to broader market fluctuations, moving quickly to cut traders if they stray too far from strict risk parameters.
Balyasny’s flagship hedge fund gained 8.3 per cent last year, said one person briefed on the performance. A global index compiled by Hedge Fund Research rose 3.7 per cent, by comparison.