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Studios tending hedges

Hedge funds worldwide total an estimated $1.3 trillion

Pen and parchment in hand, studios are busy composing a Hedge of Allegiance, for the ubiquitous funds that are their new best friends.

A hedge fund is an unregistered, privately managed pool of cash from a group of wealthy investors. Hedge funds are less regulated than other vehicles, like mutual funds. They can take more risk and bigger positions.

They’re partnerships. The general partner manages the portfolio, and he or she usually invests in the fund, too. The other investors are limited partners.

Hedge funds have been the domain of the rich, requiring an investment of $1 million or more. That’s changing: You now can get in with less.

There are 8,500-9,000 hedge funds worldwide, with assets estimated at $1.3 trillion.

They’re the motor behind the spate of studio financing deals, which all have a similar, three-tiered structure.

Big commercial banks — Merrill, CSFB, DeutscheBank — are at the top, holding what’s called the senior debt, and are first in line to get paid. They lend at standard rates (6%-8%) for low risk, low return.

A mix of hedge funds and private equity firms invest in the second and third tiers, called “mezzanine” debt, and equity. The equity portion of a deal is the highest risk, and potentially highest reward.

Three to five hedge funds usually participate in a deal.

Mezzanine players seek a circa 15% return, equity players 20% or more.

The Legendary deal, for instance, had five mezzanine players and three equity players. How many depends on how much you want to raise.

And some players put in relatively small amounts.

“They’re still kind of scared of it,” says one fund manager.

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