BOSTON -- Affiliated Managers Group Inc. is bent on expanding its exposure to the rough-and-tumble world of hedge funds.
The collector of money managers, which already has some exposure to hedge funds through six of its 15 affiliates, is on the prowl for a "pure" hedge fund shop -- that is, one that doesn't just dabble in hedge funds on the side. AMG is being lured into the business by the chance to share in the relatively high fees hedge funds charge.
A typical hedge fund pays managers 1%of total assets plus 20%of investment returns in a year, with no corresponding penalty for losses.
"In a good year, you'll get substantial upside," said Sean Healey, president and chief operating officer of AMG, whose affiliates manage more than $90 billion. "You will get that 1% plus whatever share of the profits. In a bad year, you still get the 1%"
Assets in U.S. hedge funds totaled about $400 billion at the end of 1999, up 29%from $311 billion a year earlier, according to Cerulli Associates Inc. in Boston.
Of course, AMG is not the only asset management holding company to recognize the appeal of hedge funds. Four-year-old Asset Alliance Corp. has acquired 50%stakes in eight hedge fund managers and is talking to several others. The New York-based company, which oversees $1.6 billion, isn't worried about AMG's impending entrance into the business.
Asset Alliance announced its most recent hedge fund acquisition on April 27 -- Liberty Corner Asset Management, a fixed-income shop based in Summit, N.J.
"It validates what we're doing," said Bruce Lipnick, Asset Alliance's CEO. "Look, there's 4,000 to 5,000 hedge fund managers out there, and we are looking to acquire four or five a year. So there's plenty of room for others to get into the business."
Even so, he said, AMG is in for a rude awakening as it tries to incorporate hedge fund managers into its stable of mutual fund and institutional firms. "These guys tend to be very entrepreneurial. Most hedge funds are run by people who wanted to get away from the big firms."
Then there's the risk that AMG will make a bad investment. Hedge funds are loosely regulated investment vehicles aimed primarily at the wealthy. They sometimes reap huge gains -- or suffer major losses -- from big market gambles.
"The range of risk for buying a hedge fund is much greater," said Ryan Tagal, a senior analyst at Cerulli. "You've got to make sure you do your due diligence."
AMG's Mr. Healey concedes that some hedge funds are much riskier than others. "The blowup risk is directly related to their strategy," he said. "If they have a lot of leverage and there's a risk that the leverage will come back the other way . . . well, that significantly limits the attractiveness of such a firm."
AMG also isn't worried about any cultural differences. Its business model, which allows it to buy only 51%to 70%of a company, is aimed at keeping those running the funds enticed to expand the business. Plus, it reasons, it is used to dealing with hedge fund managers.
AMG already oversees $4 billion to $5 billion in hedge fund assets.