Hedge Funds vs PE funs vs Mutual Funds

Hedge fund investors can redeem their money on short notice if they don't like a hedge fund's results—putting immense pressure on fund managers to post good quarterly results. But private equity firms "lock up" their investors' capital for years at a time. A pension fund can't simply pull money out of a private equity fund whenever it wants, and that gives the buyout firm time to focus on troubled investments. It has never been more popular to bet against stocks. Once the realm of a few specialists, the financial alchemy of turning a garbage stock into gold by shorting it has moved into the mainstream: The strategy is now employed routinely by thousands of individual traders, hedge funds, mutual funds, and others. It's a simple concept, but relatively complex to execute in the real world—and an influx of competition is making the short-seller's life even more difficult. The number of short-sellers has multiplied dramatically during the last year, thanks to the rise of so-called 130-30 funds. These funds borrow against the money they have raised, enabling them to invest 130% of their capital in stocks. They borrow additional money so that they can invest the equivalent of 30% of their original capital by going short. But as short-selling has proliferated, it has become increasingly difficult to make money at the game. Whereas a profit-challenged enterprise may once have floundered until shutting down or filing for bankruptcy, many such companies are now targets for private equity firms that style themselves as turnaround artists (see BusinessWeek.com, 10/8/06, "Private Equity Keeps Booming"). What's more, such firms are often willing to pay a rich premium to the market price for troubled outfits in which they see promise. As a result, fewer companies work as successful short plays, and the strategy has soured for many.