Hedge fund, private equity sectors seen at a peak

By Laurence Fletcher

LONDON, Sept 27 (Reuters) - The hedge fund and private equity industries have reached a near-term peak in their cycles after years of rampant growth, speakers at a Reuters Forum said on Thursday.

"Private equity and hedge funds both have cycles, and I think we're now at the peak of the cycle for the time being," said Anthony Bolton, a star fund manager at Fidelity International.

"The flow of money has encouraged some mediocre people. They will all be wiped out in the current environment, which will allow the good people to go on."

The $2 trillion hedge fund industry has seen huge inflows from institutions and wealthy individuals in recent years, thanks to its ability to make money in all market conditions.

But many funds were hit hard by equity and credit market turmoil this summer, prompted by fears that a surge in defaults in U.S. subprime mortgages would spark a wider financial crisis, and leading to worries about a wave of redemptions by investors.

"There's bound to be some backlash," said Helena Morrissey, chief executive of Newton Investment Management. "A huge amount of money has gone into some assets, and people will question that."

Large-scale corporate buyouts became increasingly common in recent years thanks to a supply of cheap debt and strong flows into private equity funds. But Charles Sherwood, a partner at private equity firm Permira [PERM.UL], noted that big buyouts had dried up during the credit crisis.

"As the credit market currently stands, the large leveraged buyout market in the Western world does not exist today," he said, pointing out that the business model depends on the use of leverage, or heavy borrowing, to "magnify" returns.