Can’t Raise Money, Can’t Cash Out: The Hedge Fund Conundrum

M&A deals for alternatives managers dropped almost 40 percent last year.

Illustration by II

Illustration by II

Perhaps the only financiers with tougher jobs than hedge fund asset-gatherers last year were the investment bankers trying to sell hedge fund firms.

Merger and acquisition deals in the category fell 32 percent in 2019 versus the year before, according to Piper Sandler’s 2019 asset manager transaction review and 2020 forecast.

That’s not surprising given the sector’s lackluster performance. HFRI’s fund-weighted composite index rose 10.4 percent, even as the Standard & Poor’s 500 delivered 31.5 percent. The cumulative return over the last 10 years for the HFRI index was 48.6 percent, while the S&P delivered 256.7 percent.

Deals for highly differentiated strategies did happen, including for three insurance-linked securities managers. French insurer SCOR bought ILS manager Coriolus Capital in the U.K.; White Mountains Insurance Group bought a minority stake in Elementum Advisors; and Schroders purchased Secquaero Advisors, according to the report published Monday.

Asset managers said they remain interested in alternatives M&A.


Activity fell almost 40 percent in 2019 to 61 transactions, but that’s off of a high in 2018, which saw the greatest number of alternatives deals (97) since the global financial crisis, particularly in real estate. In 2018, there were 97 alternative investment management transactions.

Last year might have been light in absolute numbers, but the largest transaction ever also took place. Canada’s Brookfield Asset Management bought a majority stake in Oaktree Capital Management. In 2019, 46 percent of the deals for alternatives mangers involved private equity firms and 21 percent were in real estate. The remainder were spread among hedge funds, funds of funds, managers of collateralized loan obligations, and other specialties.

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Overall, 2019 was a busy year for asset management mergers and acquisitions. There were a record number of deals, with 265 transactions. But the underlying assets involved in all those deals only amounted to $1.3 trillion, the lowest since 2010.

“The relatively low AUM that changed hands in 2019 was due to the significant number of transactions involving smaller firms, primarily wealth managers,” wrote the authors of the Piper Sandler report.

Buyers of traditional asset managers were particularly cautious. “In the traditional asset management space, many potential targets are actively seeking partners in light of secular challenges facing active management, but buyers remain very selective,” according to the report. There were 56 transactions involving traditional managers, in line with historic norms, reported Piper Sandler.

In 2019, there were 17 deals involving institutional managers, about the same number as the year prior. Resolute Investment Managers bought a majority stake in fixed income manager National Investment Services. Silvercrest Asset Management Group acquired small-cap growth manager Cortina Asset Management.

“Buyers are reluctant to acquire ‘plain vanilla’ strategies and instead are seeking managers with investment strategies or processes whose specialization better protects them from the industry-wide shift to passive management,” according to the report.

Whatever 2019 looked like, Piper Sandler doesn’t expect a slowdown in activity this year.

“After another painful year of traditional fund outflows and ever mounting costs, the status quo will not be a viable strategy and sub-scale managers with eroding profit margins will need to combine with or sell to a peer absent strong equity markets,” the authors wrote.