The success of previous fund-of-funds company acquisitions — OppenheimerFunds Inc.'s acquisition of Tremont Advisers Inc., Robeco Group NV's acquisition of Sage Capital Management LLC, BlackRock Inc.'s acquisition of a majority interest in HPB Management LLC, and Bank of New York Co.'s purchase of Ivy Asset Management Corp. — has sharpened acquirers' appetites. Of these deals, however, only BlackRock's took place this year.
"I'm seeing far more strategic alliances right now rather than outright acquisitions because with what you can sell a hedge fund firm for now at a multiple of X times revenues, you'd want to wait five years until your assets are pumped up and fees are much higher. I don't understand why anyone would sell now," said Joel Schiffman, principal, Trail Ridge Capital LLC, a hedge fund of funds firm in Greenwood Village, Colo. Prior to joining Trail Ridge, Mr. Schiffman was an institutional consultant.
"I think there will be a clustering around the major distributors of hedge funds. In major hedge fund managers that have developed processes, systems and succession of management, clearly there will be a generational change. Partners will want to cash in all or some of their businesses, and that also will cause some consolidation," said John M. Kelly, president and chief executive officer, Man Investments Inc., Chicago. Man, through its subsidiaries, is the world's largest hedge fund manager with about $32 billion under management.
"But by and large, on the investment management side, I don't think there will be huge consolidation because these are bright, independently minded individuals and they will mainly want their own businesses. Then the cycle will repeat. There will be a generational change where older people will move out, younger people will move in and then leave to start new hedge funds. I can't see there being huge companies managing blocks of assets," Mr. Kelly said.
Hedge fund consultant Lois B. Peltz, president and chief executive officer of Infovest21 LLC, New York, said one of the creative alliances struck lately is the joint venture between hedge fund manager Weston Capital Management LLC, Westport, Conn., and fund-of-funds manager The Atlas Capital Group, London, to form the Weston-Atlas Partners Fund. The fund will incubate emerging hedge fund managers, such as Sequence Capital Management, New York.
While a good number of deals will be made in the coming year by hedge fund and fund-of-funds managers to outsource everything except investment management expertise, observers emphasized the biggest impact on the industry likely will be from ownership stake-taking in more established hedge fund companies and from the seeding and incubating of emerging hedge fund management teams.