Swiss RE, the world’s second-largest reinsurer, is looking to sell its 15 percent stake in Jersey, Channel Islands–based hedge fund firm Brevan Howard Asset Management. Morgan Stanley reportedly wants to unload its position in Lansdowne Partners, the $17.5 billion hedge fund firm headquartered in London. Senior management of New York–based Highbridge Capital Management are keen to gain independence from their parent owner, JPMorgan Chase & Co., according to people familiar with the matter. A 20 percent stake in D.E. Shaw & Co. has languished in the Lehman Brothers Holdings bankruptcy estate since the investment bank filed for Chapter 11 in 2008, with limited buyer interest in the New York–based hedge fund firm, sources say.
For banks and reinsurers, hedge fund managers aren’t the hot acquisition target they were before 2008. Nor are hedge funds so anxious to sell themselves to those more highly regulated entities.
Things were much different between 2003 and late 2008, when banks sought to acquire all or part of large hedge fund firms. After John Mack became CEO of Morgan Stanley in 2005, his eagerness for the U.S. bank to buy hedge fund businesses resulted in the 2006 purchase of FrontPoint Partners. In 2007, Citigroup bought Old Lane Partners, the hedge fund firm founded just a year earlier by Vikram Pandit and others, for $800 million. FrontPoint and Old Lane have since been shut down by their bank owners.
Regulation has played a big role in cooling relations between banks and hedge funds. Greater capital requirements for banks in Europe and the U.S. make hedge funds less appealing, as do accounting requirements that banks treat limited partner assets as general partner assets on their balance sheets. In the U.S. the Volcker Rule, part of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, thwarts banks’ ability to invest their own capital in hedge or private equity funds.
“That’s three strikes and you’re out,” says Donald Putnam, founder and managing partner of Grail Partners, a San Francisco–based investment and merchant bank specializing in investment management. “The banks are toast.”
The limitations also make banks less appealing partners for hedge funds; asset management powerhouses such as BlackRock and Blackstone Group have much greater ability to put seed capital to work.
Control and price are two other potential disincentives for banks. A minority stake in the 15 to 20 percent range typically doesn’t come with any control over the business. And in the case of D.E. Shaw, sources say the asking price that the Lehman estate wants for the assets is broadly considered too rich.
The right deal can still make sense for large investment houses looking to build their hedge fund bench or for specialty firms such as holding company Affiliated Managers Group. In December, Beverly, Massachusetts–based AMG announced that it had boosted its minority stake in AQR Capital Management. Greenwich, Connecticut–headquartered AQR has $115 billion in hedge fund and traditional strategies.
Succession planning remains a strong motivation for hedge funds looking to sell a piece of themselves, and with a growing number of hedge fund founders reaching retirement age, more firms will need to start planning for a future beyond their founding partners. The opportunity for succession planning was one reason why, in 2013, Blackstone launched a fund dedicated to taking GP stakes in mature hedge fund firms. New York–based asset manager Neuberger Berman has a similar division, Dyal Capital Partners, that focuses on buying hedge fund GP interests. By stepping back, making the market less competitive, banks have helped create an opening for ventures like Dyal.
Not all banks are exiting the hedge fund and alternative-investment game entirely. In February, Goldman Sachs Group announced that David Z. Solomon, former global co-head of capital introduction at the bank, was switching over to Goldman Sachs Asset Management to help lead fundraising for Goldman Sachs Investment Partners, a hedge fund headed by former Goldman proprietary traders Raanan Agus and Kenneth Eberts. Putnam believes Goldman’s continuing interest in alternatives might suggest that the firm is planning for a future in which it is no longer a commercial bank. “Goldman Sachs is called a bank at the moment,” he says. But it may not stay one forever. •