Hedge funds and private equity funds control a significant share of global wealth, and for years the line between them was clear. Hedge funds held liquid, publicly traded securities and let investors withdraw periodically. Private equity funds locked up capital for a decade to buy private companies. That line has blurred as managers pursue less liquid opportunities and investors demand new kinds of flexibility.
In this TalksOnLaw interview, Joel Cohen sits down with Ira Kustin, a partner in the investment management practice at Akin and a Chambers-ranked hedge funds lawyer, to explain how private funds work and how their structures have changed.
What Makes a Fund "Private"
Private funds are not offered to the public or listed on an exchange. They are sold through private placements, and to stay exempt from registration under the Securities Act of 1933 and the Investment Company Act of 1940, every investor must meet certain qualifications.
Traditional Structures
Traditionally, hedge funds were open-ended. After an initial lock-up, often a year, investors could withdraw monthly, quarterly, or annually, so the portfolio had to stay liquid. Private equity funds were closed-ended. Investors made a long-term commitment, often for ten years, with little ability to exit except through an occasional transfer.
Convergence: Hedge Funds Go Illiquid
Beginning in the mid-2000s, observers described "convergence." Hedge fund managers wanted a more stable capital base, struggled to generate returns from public securities alone, and found attractive private opportunities within their areas of expertise. A manager specializing in one region, for example, might start making privately negotiated investments there. The challenge was fitting illiquid assets into a fund that promises liquidity.
The Toolkit: Side Pockets, Gates, and More
Kustin walks through the tools managers use. Side pockets hold illiquid investments, typically capped at 10 to 20 percent of an investor's capital account, and are paid out only when the investment is realized. Suspension provisions let managers halt withdrawals in extreme circumstances. Once seen as a career-ending step, suspension carries less stigma since several funds survived using it in 2008–2009. Slow-pay/fast-pay mechanisms split withdrawal proceeds into liquid and illiquid streams, and separate classes or series give different liquidity profiles to different assets. Gates limit how much capital can leave in a period, at the investor level, the fund level, or both. For larger commitments, managers can use sidecar or overflow vehicles, or launch a separate private equity fund alongside the hedge fund. Many of these changes require investor consent if they were not built into the original documents.
Private Equity's End-of-Life Problem
Private equity funds have their own growing pains. After the investment period, a fund enters its harvest period and eventually must wind up, but a few "zombie" assets may remain unsold, and selling them quickly means a fire sale. Short extensions are common, but longer ones need investor approval. A secondary market has developed to buy investors' interests or remaining assets at a discount. Newer funds build in end-of-life flexibility: rolling remaining assets into a successor fund or a liquidating vehicle, and reducing or waiving management fees on long-held assets, although managers typically keep their carried interest.
Harder to Launch, More Specialized
Launching a fund on reputation alone is much harder than it was 15 or 20 years ago. Institutional investors such as state pension plans face fiduciary scrutiny of their manager selection, and the SEC, the CFTC, and other regulators devote more, and more sophisticated, resources to examining and enforcing against private funds. Large managers have an advantage and have consolidated talent. Smaller managers succeed through specialized expertise or a distinctive track record. Kustin cautions that a manager spinning out of a larger firm must have the records to support any track record used in marketing materials, and may be contractually restricted from using it.
Kustin's Prediction
To pursue opportunities across liquid and illiquid assets, Kustin predicts that managers will operate multiple classes within one fund or multiple product lines at once: a hedge fund, a private equity fund, and separately managed accounts, rather than a single flagship fund.
What to Know Now
Kustin's prediction has largely come true. Large alternative asset managers now run broad platforms spanning hedge funds, private equity, private credit, real estate, and infrastructure. Big traditional asset managers have acquired alternatives firms to join them, and private credit has grown into a major asset class. The end-of-life tools he described have become mainstream. GP-led secondaries and continuation funds, in which a manager moves prized assets into a new vehicle and gives investors the option to cash out or roll over, grew rapidly, prompting industry guidance on conflicts and fairness. Semi-liquid "evergreen" funds sold to wealthy individuals, such as non-traded REITs, business development companies, and interval and tender-offer funds, have brought gates into the headlines. When withdrawal requests surged in 2022 and 2023, and again at several large private credit funds in early 2026, prominent funds limited redemptions exactly as their gating provisions allowed.
Regulation has shifted too. The SEC's Marketing Rule, in effect since 2022, governs how advisers present performance and requires records supporting it. That formalizes Kustin's warning about portable track records. The SEC's 2023 private fund adviser rules, which would have restricted preferential terms and certain fees, were vacated by the Fifth Circuit in 2024, while Form PF amendments adopted in 2023 and 2024 expanded reporting to regulators, though compliance with the 2024 changes has been pushed to 2027 and regulators proposed in 2026 to scale much of it back. Policymakers are also encouraging broader access to private markets, including through registered funds and retirement plans. Supporters see greater diversification and returns, while critics point to fees, valuation, and the very liquidity limits Kustin described.
