Tightening Your Budget

Capital raising for hedge funds has become increasingly challenging in recent years. Anyone interested in capital raising for private equities should understand the headwinds in the modern environment. To ensure your operation will be properly capitalized, watch out for these three ongoing issues.

Interest Rates

The cost of capital has simply become more expensive thanks to the efforts of the Federal Reserve System to raise interest rates. For the Fed, the goal is to reduce the overall amount of money in the economy. That is great for a government official trying to stabilize the economy, but it's a challenge for hedge funds that need to raise capital.

Even if your company still has access to sufficient capital through lenders, interest rates are going to drive up the costs. Consequently, many parties looking for capital raising for private equities are turning to alternative sources. They are more likely to go directly to potential investors and lenders for capital outside the traditional loan structure. This may mean staking partners in the fund, but it can reduce the cost of capital.

Deglobalization

Hedging strategies tend to work better in target-rich environments. After all, the best way to avoid a bad plan is to have several other options. Deglobalization, however, is driving regulators, businesses, and exchanges to focus on fewer choices. Worse, these choices operate within a smaller circle of economies and industries because business writ large is rapidly reshoring manufacturing, especially as firms want to get away from risk exposure in China.

This trend isn't all downside, though. It does reduce competition in offshore markets, and that can often lower the cost of entry. Similarly, a fund that does a good job of targeting reshoring operations stands a good chance of finding big payoffs. However, firms operating on either of these premises will have to work harder to sell investors on the idea while raising capital.

COVID-19 Pandemic

The COVID-19 pandemic continues to generate ripples throughout global financial markets. Public spending habits haven't reverted to pre-pandemic patterns in many sectors. Likewise, many equities that were darlings in the early days have lost their shine, especially those focused on more home-centric lifestyles.

At the same time, commercial real estate has struggled to bounce back because work-from-home employment models have proven sticky. This has negatively affected asset valuations for companies that relied on extensive CRE portfolios, and that has reduced their access to capital in turn. Also, those firms become inherently less investable.

Pandemic-related instability is likely to persist for the foreseeable future. For hedge funds, that means more unpredictable outcomes and greater questions about potential sources of capital.