Friday, October 01, 2004
WSJ Article on Banks Buying Hedge Funds
Wall Street Covets Hedge FundsNow That They're Mainstream
By SILVIA ASCARELLI Staff Reporter of THE WALL STREET JOURNALOctober 1, 2004; Page C5
LONDON -- Wall Street's renewed interest in buying hedge-fund companies shows just how mainstream these lightly regulated vehicles are becoming.
Once they were considered niche products for the super-rich, but now pension funds, insurance companies and other professional investors are giving hedge funds a larger chunk of their money. Indeed, one recent study predicted that the amount of money going into such investments from U.S. institutional investors could quintuple within five years.
Such growth makes them an appealing source of fees for the asset-management arm of brokerage firms, and buying a firm instantly provides the necessary track record to pitch to investors.
But any buying binge could be stymied by the relatively small proportion of the world's 11,000 hedge funds that would be large enough to appeal to the biggest brokers. And, not all of those will be willing sellers.
This week, J.P. Morgan Chase & Co. agreed to pay $1.3 billion for a majority stake in Highbridge Capital Management, which manages around $7 billion of assets. As first reported by The Wall Street Journal yesterday, Lehman Brothers Holdings Inc. is in preliminary talks to acquire GLG Partners, a London-based hedge fund in which it already owns 20%, according to people familiar with the matter.
GLG manages close to $13 billion in 16 funds, but doesn't widely disclose its performance. It's not clear whether those talks will result in a deal. A Lehman spokesman declined to comment.
But hedge-fund industry officials say that regardless of whether the two link up, other deals are likely.
"The hedge-fund industry is going to see a further wave of consolidation," predicted Alberto La Rocca, chief executive of Dublin-based Pioneer Alternative Investments, a unit of Italian banking giant Unicredito SpA that manages more than €4 billion ($4.93 billion) in hedge-fund monies. It acquired Momentum Asset Management, a London company that specializes in funds of hedge funds, two years ago. "We're now at a point in the industry where global distribution is what's needed to develop your business," he added.
Funds of hedge funds pool together hedge funds that follow a range of investment strategies in order to reduce the risk to investors. They're also more appealing to buyers, because their returns, and therefore their earnings, are more predictable. As individual fund managers broaden their range of funds, they could become more appealing to potential buyers.
"There's an increased maturity of the hedge-fund industry, with the spotlight turning on the individual hedge funds themselves," said Anthony Todd, managing director of Aspect Capital Ltd., a London hedge-fund manager with about $3.5 billion under management.
Earlier this year, Mellon Financial Corp., which owns the Dreyfus family of mutual funds, acquired Evaluation Associates Capital Markets, a Connecticut-based manager of $4.5 billion in funds of hedge funds, and French banking group BNP Paribas SA acquired Zurich Financial Services' U.S. funds-of-funds business, Javelin.
But Wall Street's interest in hedge funds comes just as these investments have struggled to make investors money this year. The Hennessee Hedge Fund Index, one of several broad indexes tracking hedge-fund performance, rose just 1.16% after fees through August. Investors on average expect returns of about 8%, according to a study published last month by Bank of New York.
Lower returns also mean that hedge funds need to manage more money if they're to remain as profitable. Such funds take as much as 20% of any gains in addition to a standard management fee.
It's not clear to what extent the poorer returns are denting investor appetite. Man Group PLC, one of the world's biggest hedge-fund groups, estimated on Wednesday that it took in $7 billion in new investments from April 1 to yesterday, but only $1 billion was in the past three months.
But in a study published last month, Bank of New York estimated that the amount of hedge-fund money from U.S. institutional investors will top $300 billion by 2008, up from $66 billion in 2003. The surge will be driven by pension funds, which so far have lagged behind endowments and foundations in their use of hedge funds.
Write to Silvia Ascarelli at silvia.ascarelli@wsj.com1
URL for this article:http://online.wsj.com/article/0,,SB109657736253432869,00.html
Hyperlinks in this Article:(1) mailto:silvia.ascarelli@wsj.com
By SILVIA ASCARELLI Staff Reporter of THE WALL STREET JOURNALOctober 1, 2004; Page C5
LONDON -- Wall Street's renewed interest in buying hedge-fund companies shows just how mainstream these lightly regulated vehicles are becoming.
Once they were considered niche products for the super-rich, but now pension funds, insurance companies and other professional investors are giving hedge funds a larger chunk of their money. Indeed, one recent study predicted that the amount of money going into such investments from U.S. institutional investors could quintuple within five years.
Such growth makes them an appealing source of fees for the asset-management arm of brokerage firms, and buying a firm instantly provides the necessary track record to pitch to investors.
But any buying binge could be stymied by the relatively small proportion of the world's 11,000 hedge funds that would be large enough to appeal to the biggest brokers. And, not all of those will be willing sellers.
This week, J.P. Morgan Chase & Co. agreed to pay $1.3 billion for a majority stake in Highbridge Capital Management, which manages around $7 billion of assets. As first reported by The Wall Street Journal yesterday, Lehman Brothers Holdings Inc. is in preliminary talks to acquire GLG Partners, a London-based hedge fund in which it already owns 20%, according to people familiar with the matter.
GLG manages close to $13 billion in 16 funds, but doesn't widely disclose its performance. It's not clear whether those talks will result in a deal. A Lehman spokesman declined to comment.
But hedge-fund industry officials say that regardless of whether the two link up, other deals are likely.
"The hedge-fund industry is going to see a further wave of consolidation," predicted Alberto La Rocca, chief executive of Dublin-based Pioneer Alternative Investments, a unit of Italian banking giant Unicredito SpA that manages more than €4 billion ($4.93 billion) in hedge-fund monies. It acquired Momentum Asset Management, a London company that specializes in funds of hedge funds, two years ago. "We're now at a point in the industry where global distribution is what's needed to develop your business," he added.
Funds of hedge funds pool together hedge funds that follow a range of investment strategies in order to reduce the risk to investors. They're also more appealing to buyers, because their returns, and therefore their earnings, are more predictable. As individual fund managers broaden their range of funds, they could become more appealing to potential buyers.
"There's an increased maturity of the hedge-fund industry, with the spotlight turning on the individual hedge funds themselves," said Anthony Todd, managing director of Aspect Capital Ltd., a London hedge-fund manager with about $3.5 billion under management.
Earlier this year, Mellon Financial Corp., which owns the Dreyfus family of mutual funds, acquired Evaluation Associates Capital Markets, a Connecticut-based manager of $4.5 billion in funds of hedge funds, and French banking group BNP Paribas SA acquired Zurich Financial Services' U.S. funds-of-funds business, Javelin.
But Wall Street's interest in hedge funds comes just as these investments have struggled to make investors money this year. The Hennessee Hedge Fund Index, one of several broad indexes tracking hedge-fund performance, rose just 1.16% after fees through August. Investors on average expect returns of about 8%, according to a study published last month by Bank of New York.
Lower returns also mean that hedge funds need to manage more money if they're to remain as profitable. Such funds take as much as 20% of any gains in addition to a standard management fee.
It's not clear to what extent the poorer returns are denting investor appetite. Man Group PLC, one of the world's biggest hedge-fund groups, estimated on Wednesday that it took in $7 billion in new investments from April 1 to yesterday, but only $1 billion was in the past three months.
But in a study published last month, Bank of New York estimated that the amount of hedge-fund money from U.S. institutional investors will top $300 billion by 2008, up from $66 billion in 2003. The surge will be driven by pension funds, which so far have lagged behind endowments and foundations in their use of hedge funds.
Write to Silvia Ascarelli at silvia.ascarelli@wsj.com1
URL for this article:http://online.wsj.com/article/0,,SB109657736253432869,00.html
Hyperlinks in this Article:(1) mailto:silvia.ascarelli@wsj.com
# posted by Tom @ 8:24 AM 
