Hedge funds seem to have been less affected by the credit crunch than most, and a quick analysis of Blackstone Group's latest results adds strength to that argument. Blackstone, best known as a private equity manager, saw second-quarter earnings declined from a year earlier but managed to beat Wall Street expectations, as gains from its hedge funds business offset a decline in private equity revenues.

Blackstone reported a net profit of USD99.9m in the second quarter, down from USD735.6m in the same period of 2007. Its management fees and carried interest on fund profits have plunged as buyouts of more than USD2bn largely dried up and initial public offerings fell to their lowest level in four years.

However, the firm's marketable alternative asset management business, which includes single-manager funds and funds of hedge funds, boosted its profit by 34 percent to USD225.2m. Blackstone's alternatives business managed a fraction under USD60bn at the end of the quarter or just under half its total assets, compared with USD30.3bn in corporate private equity assets and USD29.3bn in real estate.

Chief executive Stephen Schwarzman has led a strategy of expansion in the alternatives area, including the acquisition of GSO Capital Partners earlier this year bought to expand Blackstone's hedge fund and debt investing activities, in a cash and stock deal worth up to USD930m. At the end of last month the firm took a minority interest in Bayview Asset Management, which manages a USD2bn fund investing in mortgage loans and mortgage-backed securities.

This investment is the latest indication that leading private equity groups are seeking further diversification, especially in an area of the financial markets that has been less affected by the downturn. Others are bound to follow.