Hedge and buyout funds see pressure building

By Svea Herbst-Bayliss and Michael Flaherty

NEW YORK (Reuters) - Hedge funds and private equity funds, having established themselves as a major force on Wall Street, are now facing pressure on multiple fronts.

Hedge fund returns are, on average, declining, while private equity returns are widely expected to slip. Regulators are honing in on hedge funds, and some believe buyout firms are next.

Still, opportunities for the two asset classes are abundant, analysts say, and investment banks remain fixated on courting their business.

Returns, regulation, opportunities and pitfalls within hedge fund and private equity investing are among the topics to be tackled at the Reuters Hedge Funds and Private Equity Summit held in New York and London this week.

Private equity firm Apax Partners and executives from Morgan Stanley and Barclays, along with several hedge funds, will attend the summit in London. In New York, private equity executives from the Blackstone Group, Silver Lake Partners, Sun Capital and others will attend.

Hedge funds representing tens of billions of dollars will also be there, including the new CEO of Harvard's $20 billion endowment, Mohamed El-Erian; Joel Greenblatt of Gotham Capital and best selling author of "The Little Book that Beats the Market," and Carrie McCabe, CEO of Financial Risk Management, a $12 billion top-tier fund that invests in hedge funds.

Hedge funds, which focus on rapid trades in and out of securities for quick profits, and private equity, which buy companies or controlling stakes and sell them later, have seen their popularity soar in the years after the stock market tumbled in the wake of the Internet bubble's collapse.

Indeed, institutional investors -- pension funds, endowments -- are attracted to the excellent returns top-tier hedge and buyout funds have produced in recent years, amid a lackluster stock market by comparison.  Continued...