Alternative investment managers are sifting through the wreckage of the money management industry, seeking once-brilliant diamonds roughed up by last year's market meltdown — good credit portfolio managers and/or firms.
Citadel Investment Group LLC, Chicago, is adding traditional fixed-income investment strategies for institutional investors, the hedge fund heavyweight's first foray into long-only management. The new business is headed by James Kauffmann, who left ING Investment Management, Americas, New York, after the firm's Dutch parent ran into credit problems and received a Dutch government bailout package in 2008 and subsequently restructured the investment unit's U.S. bond team.
Private equity and hedge fund manager Fortress Investment Group LLC, New York, sees the “mess” that is the investment management business “as an opportunity” and is actively talking with both traumatized companies and investment teams to work out an acquisition or a deal, Daniel H. Mudd, CEO and director, told investors during the firm's Nov. 6 third-quarter earnings call. One strong acquisition possibility, said investment banking sources, is a long-only fixed-income shop.
Citadel and Fortress are the most recent alternatives managers to publicly state their intention to diversify and reduce the volatility of their businesses by adding long-only, institutionally oriented investment strategies to secure steadier income streams, said investment banker Aaron Dorr, New York-based managing director of Jefferies Financial Institutions Group.
Attracting significant assets from institutional investors may not be easy, given that the market is dominated by a small, tight knit club of large bond managers, said Daniel Celeghin, director, Casey Quirk & Associates LLC, Darien, Conn.
“It's going to be a big challenge to go up against the industry's two huge fixed-income machines — Pacific Investment Management Co. and BlackRock Inc. Besides having gigantic investment capabilities and infrastructure, they both have large, sophisticated, smooth marketing and client service machines that permit them to spend a lot of time with each of their clients. The deck will be stacked against Citadel, Fortress and anyone else who has to face these big bond managers in finals searches,” Mr. Celeghin said.
Citadel executives are interested in building one of the industry's best fixed-income shops, not the biggest, said Mr. Kauffmann, who joined the firm in mid-November as managing director and head of the firm's fixed-income long-only strategy. Citadel has “a commitment to be an exceptional money manager, rather than the largest asset-gathering machine,” he said.
Mr. Kauffmann has a long institutional pedigree: for 13 years, he had oversight of domestic bonds for institutional investors, ultimately totaling $40 billion, as both head of fixed income and senior vice president at ING Investment Management, Americas.
In an interview from his New York office, Mr. Kauffmann said he and other high-level investment executives from ING's U.S. bond team left the firm in January after a major restructuring of the fixed-income unit and then spent six months talking to potential partners.
At the same time, Citadel founder and CEO Kenneth C. Griffin was looking for ways to broaden the company's investment strategies, said spokeswoman Katie Spring. “Building a long-only fixed-income business is consistent with Citadel's DNA, part of the way the firm has added businesses over the years,” Ms. Spring said.