January 19, 2007 / 11:29 PM / in 12 years

Hedge funds play critical role in IPOs

NEW YORK (Reuters) - As hedge funds snap up more shares of newly listed companies, they are diluting a handful of mutual funds’ ability to set prices for initial public offerings, senior bankers told the Reuters Hedge Funds Summit on Thursday.

Sometimes blamed for prompting market declines by using trading techniques that are off limits at most mutual funds, hedge funds are now getting some select praise for the role they play in the IPO market.

“I’m all in favor of having hedge funds in the IPO market,” said Robert Niehaus, Chairman of Greenhill Capital Partners LLC, explaining that more competition for a piece of a newly listed company is often a good thing.

Industry experts, including Niehaus, said Boston-based mutual fund firms like Fidelity Investments, Wellington Management and State Street Global Advisors once played a dominant role in pricing new share issues.

Now “you can get a pricing done in New York within a 12 block radius,” said Scott Bok, Co-President of Greenhill & Co.

(GHL.N)

Boston has long been home to some of the world’s biggest mutual fund companies, including Putnam Investments and MFS Investment Management, while many of the world’s roughly 7,000 hedge funds are based in New York.

However both Bok and Niehaus said companies listing their shares can not strike Boston off their travel plans quite yet because mutual funds traditionally hold stock for a long time while hedge funds are generally seen as short-term traders.

“The large Boston mutual funds have lost some leverage in the pricing of initial public offerings,” Niehaus said.

The loosely regulated hedge fund industry has doubled in size to $1 trillion in the last five years, but it is only a fraction of the size of the roughly $8 trillion mutual fund industry, where most Americans invest their savings.

As demand for hedge funds grows — some reports show assets quadrupling to $4 trillion by 2013 — more and more of them are seeking alternative ways to make money and many are investing in stocks, including newly listed ones.

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