Deals not always the best for funds of funds

Updated with correction

The acquisition spree of the past decade has produced mixed results for acquirers of hedge funds and funds of funds and the firms they bought.

Using growth of assets under management to gauge success, full or majority stake hedge fund purchases generally fared better than their hedge funds-of-funds deal counterparts, Pensions & Investments' analysis showed.

J.P. Morgan Asset Management's 2004 acquisition of hedge fund manager Highbridge Capital Management LLC, for example, has been a big winner, sources said. Highbridge managed $7.3 billion at the time of the acquisition, but that amount has risen to $15.4 billion as of June 30, confirmed Kristen Chambers, a JPMAM spokes-woman, in an e-mail.

Highbridge's assets were swelled by a $6 billion infusion through its own 2010 acquisition of a majority stake in Brazilian global macro hedge fund manager Gavea Investimentos, Ms. Chambers added.

Together with non-Highbridge managed strategies, New York-based JPMAM reported worldwide hedge fund assets of $26.5 billion as of June 30, making it the 10th largest hedge fund manager in P&I's annual survey of hedge fund and fund-of-funds managers.

Less successful from an asset gathering perspective was Man Group PLC's 2012 acquisition of FRM Holdings Ltd. The firm's hedge fund-of-funds assets declined 39% in the two years ended June 30.

London-based Man Group added FRM's $8 billion of hedge funds-of-funds assets to its own $11 billion fund-of-funds business for a midyear 2012 total of $19 billion.

A year later, Man Group's hedge funds of funds were down 21% to $15.1 billion as of June 30, 2013. Assets fell a further 23% to $11.5 billion as of June 30, according to P&I's 2014 data. Man Group has since added $1 billion of hedge fund-of-funds assets from its Aug. 4 acquisition of Pine Grove Asset Management LLC.

“The change in AUM is reflective less of direct redemptions than it is of the broadening of services and the types of solutions provided to clients in this evolving space,” said Michelle McCloskey, senior managing director of Man-FRM, in an e-mail.

“This change in (assets under management) can largely be attributable to the winding down of historic, legacy European commingled (hedge fund-of-funds) products,” she added. Ms. McCloskey is based in the New York office of London-based Man Group.

In the case of Legg Mason Inc., Baltimore, its hedge fund-of-funds unit managed a bit more — $20.6 billion as of June 30 — than the $19.3 billion The Permal Group brought to the multiasset-class money management company in November 2005.

But holding on to the $6 billion the January 2013 acquisition of hedge fund-of-funds manager Fauchier Partners LLP brought to Permal proved more difficult, said Shane Clifford, executive vice president, head of global business development in New York.

“Redemptions were inevitable with the purchase of Fauchier. In fact, we factored them in and were pleasantly surprised that they were lower than anticipated,” said Mr. Clifford.

Like Man Group, Permal also wound down some older commingled hedge funds of funds during the 18 months ended June 30, resulting in a total decline of 12% from the $23.5 billion managed in hedge funds of funds as of Jan. 1, 2013.

The dramatically different results of the J.P. Morgan Asset Management, Man Group and Legg Mason acquisitions are indicative of “a mixed bag. Many of the deals being made in the hedge fund industry and especially for hedge funds-of-funds companies are situation dependent,” said Kevin P. Quirk, co-founder and partner of specialist money management consultant Casey, Quirk & Associates LLC, Darien, Conn., in an interview.

In fact, results also have been mixed for private equity firms that bought hedge fund and fund-of-funds managers or brought in specialist management teams to broaden their alternative investment offerings.

It's early days for The Carlyle Group LP's February 2014 acquisition of hedge fund-of-funds manager Diversified Global Asset Management Corp., but DGAM's assets rose a slight 3% to $2.4 billion in the year ended June 30, P&I's survey showed.

The 55% majority ownership stakes Washington-based Carlyle took in three hedge fund managers have had mixed results with regard to asset growth:

• Claren Road Asset Management LLC's assets rose 80% to $8.1 billion as of Feb. 28, according to its most recent SEC ADV, from $4.5 billion in December 2010 when Carlyle acquired its stake;


• Emerging Sovereign Group LLC's assets rocketed 393% to $7.9 billion as of April 1, according to the most recent SEC ADV, from July 2011 when Carlyle bought a stake; but


• Vermillion Asset Management LLC, on the other hand, experienced a 55%decline in assets to $1 billion as of April 1, according to its most recent ADV, from $2.2 billion as of September 2012 when Carlyle became the firm's majority owner.

KKR & Co. LP, New York, has seen 40% growth in assets managed by hedge fund-of-funds manager Prisma Capital Partners LP to $10.9 billion as of June 30, up from $7.8 billion when it acquired 100% of Prisma in October 2012.

KKR's effort to set up a long/short equity fund run by a team of former proprietary traders lured from Goldman Sachs Group Inc., however, was not successful. The fund was launched in August 2011 and closed in May 2014 with $510 million under management. Just $237 million of that total was from external clients, Bloomberg reported.

More so than hedge fund partners, fund-of-funds founders have been pushed by circumstances to sell 100% or a majority stake of their firms, Mr. Quirk said.

“So much of the fuel for the growth of the hedge funds-of-funds industry came from institutional investors. Pensions drove that business,” said Mr. Quirk.

But the advent of “new, cheaper hedge fund consultants” such as Albourne Partners Ltd. and Cliffwater LLC gave institutions more confidence to select their own hedge fund managers and run their own portfolios, and “disintermediated” hedge funds of funds, Mr. Quirk said.

“Hedge funds-of-funds managers were unprepared for the change in the investing habits of their core investors. If you talked to the executives of the big hedge funds-of-funds companies in 2007, they would never have envisioned this outcome. They have gone from feast to famine. Merger and acquisition activity is very natural, given the change in the investor market,” said Mr. Quirk.

K2 Advisors LLC took the acquisition bait and sold a 69% equity stake to Franklin Templeton Investments, San Mateo, Calif., in November 2012.

The move has been successful for both partners, said Craig Allen, a Franklin Templeton spokes-man, in an e-mail.

K2 Advisors held on to the $9.3 billion in fund-of-funds strategies it brought to FTI until December 2013, when the $45.3 billion Teachers Retirement System of Illinois, Springfield, redeemed its $537 million mandate as part of a move to direct hedge fund investment.

K2's hedge fund-of-funds assets fell 7% to $8.7 billion in the year ended June 30, P&I's survey data showed.

Aside from the loss of the one large mandate, Mr. Allen said K2's net inflows were net positive in 2013.