Big-name managers expanding operations

Barclays Global Investors and State Street Global Advisors, two of the world's largest money managers, are significantly expanding their hedge fund operations in response to what they say is client demand for portable alpha and absolute return strategies.

San Francisco-based BGI managed $15 billion in hedge funds as of Dec. 31, a respectable number but just 1% of its total assets. SSgA, Boston, managed about $3 billion in single-strategy hedge funds as of Dec. 31. SSARIS Advisors LLC, Stamford, Conn., a majority-owned subsidiary of the State Street Global Alliance (a joint venture between SSgA and the €168 billion Stichting Pensioenfonds ABP, Heerlen, Netherlands), managed an additional $1 billion in hedge funds and funds of funds. In total, that's only 0.27% of SSgA's global assets.

Executives at both companies are driven by an urgent need to hang on to institutional clients now — or soon to be — searching for real alpha generation.

Both firms have big enhanced indexed businesses that already provide alpha generation for institutional clients.

BGI, strictly an institutional manager, is building a hedge fund-of-funds operation that will launch strategies later this year. The fund-of-funds unit, known as the alpha management group, was created because the firm's internally managed, single-strategy hedge funds have been so successful, said Stan Beckers, managing director and the London-based head of the new unit.

BGI managed $13.5 billion in market neutral, equity and credit funds at the end of 2005; these single-strategy funds are closed to new investment. A multistrategy hedge fund launched last May attracted $1.5 billion in its first seven months and soon will reach its upper capacity limit of $3 billion, Mr. Beckers said.

The demand from BGI clients for absolute return strategies is larger than BGI can accommodate with internally managed hedge funds, Mr. Beckers said. BGI will apply the same quantitative and analytical approach used in managing stocks and bonds internally to selecting outside hedge fund managers "that will provide non-directional, diversified, skill-based sources of alpha," he said. No target size has been set for the hedge fund of funds, but Mr. Beckers noted that "this is not worth doing unless it puts BGI on the map and among the largest players in the industry."

BGI is in the process of staffing the fund-of-funds effort, which will be based in London and New York. Jonathan Morgan was hired as managing director to head the hedge fund-of-funds manager research and selection operations. He was chief investment officer of the alternatives business of Julius Baer Investment Management Inc., New York. William Marr, Julius Baer‘s global head of alternative investments, declined to comment on Mr. Morgan's replacement.

SSgA is strengthening and expanding its internal single-strategy hedge fund management with plans to combine those strategies into a new multistrategy hedge fund it will launch at the end of the first quarter or beginning of the second quarter. The move is the logical next step in separating alpha and beta sources, a process that has been evolving for the last few years, said Jane Tisdale, managing director of hedge fund strategies.

Seven single-strategy hedge funds now are offered by SSgA. The latest fund, boasting a fixed-income absolute return rate strategy, was launched at the end of December.

Creating the multistrategy hedge fund required a "significant initiative" to expand the number of hedge fund strategies managed internally and to add support in Boston and London, Ms. Tisdale said. SSgA executives are still looking for talented investment management staff and teams. Although Ms. Tisdale declined to say how many more people would be hired, reports said the number might be as high as 30.

"We will continue to add new investment strategies to the multistrategy fund and may launch new funds as well. We won't stop at 20 strategies or anything like that. The hedge fund space is growing and changing all the time, and we will need to adapt along with it," Ms. Tisdale said.

Industry sources aren't surprised that executives at large money managers are on the prowl for hedge fund capability.

"Any managers that have a large institutional client base, or want one, have a need for internal hedge fund management," said Eric C. Weber, partner and director of the asset management practice at Freeman & Co., New York, an investment bank.

But observers say it has been difficult for some large financial services companies to create successful hedge fund businesses internally. They point to a recent rash of hedge fund and fund-of-funds acquisitions as proof that most investment management companies want hedge funds, but recognize that building them from scratch probably won't be fast or successful.

"Very few big institutions that have tried to build hedge funds have much to show for it. Many are between one and three years into the process and are not showing results," said Joe Hershberger, managing director at the investment bank Putnam Lovell NBF, New York.