When Lehman Brothers announced its purchase of 20 percent of New York hedge fund D.E. Shaw & Co. in March, it wasn't hard to guess at its motives. Wall Street firms, like Morgan Stanley, have been gobbling up hedge funds to get into that lucrative business, and $29 billion-in-assets Shaw was quite a tempting target: From 2001 through 2006, its annualized returns averaged 18.3 percent. D.E. Shaw could take Lehman's ambitious alternatives business to a new level.
But what was D.E. Shaw's reason for selling?
According to people close to the deal, David Shaw, the former Columbia University computer science professor who founded the fund in 1988, was looking to diversify his own capital base and take some money off the table. After all, Shaw, 56, began stepping back from daily operations more than five years ago. Today he prefers to devote his time to scientific research, using computer modeling to search for a cure for cancer.
The hedge fund, however, was not shopping itself around. It did not engage an investment bank to help negotiate a sale, and according to people involved in the deal, Lehman was the only potential buyer D.E. Shaw spoke with. Neither side would reveal the terms of the transaction.
Since its 2003 acquisition of New Yorkbased high-net-worth money management firm Neuberger Berman, Lehman has been acquiring minority stakes in other top hedge funds, including $15.8 billion-in-assets GLG Partners in London and New York's $5.5 billion Ospraie Management. A year ago the bank hired George Walker, second cousin of President George W. Bush and Goldman Sachs' head of alternatives, as global head of investment management. Discussions for the D.E. Shaw deal -- estimated to have cost Lehman as much as $1.7 billion -- were under way, sources say, before Walker joined Lehman.
D.E. Shaw's last collaboration with a bank did not end well. In 1997 the hedge fund struck up an agreement with San Franciscobased Bank of America whereby BofA would loan D.E. Shaw $1.4 billion and the hedge fund would run various businesses -- including a fixed-income arbitrage strategy -- for the bank. But the relationship fell apart less then two years later, after D.E. Shaw experienced significant losses in the wake of Russia's 1998 bond default and BofA was acquired by NationsBank.
As to what the Lehman transaction means for D.E. Shaw's investors, Trey Beck, a managing director and spokesman with the fund and David Shaw's former assistant, insists Lehman's 20 percent stake will not change the way the firm operates. "We don't anticipate any meaningful impact on our day-to-day operations," he says.