Though the news came as a surprise to most, J.P. Morgan Chase & Co.'s agreement last month to buy a majority stake in hedge fund Highbridge Capital Management marked the culmination of a five-year courtship between Jes Staley, head of JP Morgan Fleming Asset & Wealth Management, and Highbridge founders Glenn Dubin and Henry Swieca.
When Staley was head of J.P. Morgan's private bank back in 1999, Highbridge was the first hedge fund he recommended to his clients. A partnership was the next logical step. "Glenn and I were talking about this years ago," Staley acknowledges. Adds Dubin, "We were ready to get married if we found the right partner."
Staley says the discussions became "more earnest" nine months ago when he realized that his clients -- especially institutions and very wealthy individuals -- were increasingly moving into absolute-return investments. An alternative-investment colossus, JP Morgan Fleming currently runs $3 billion in its own hedge funds and $8 billion in funds of hedge funds, plus a further $9 billion in funds of private equity funds and $18 billion in real estate funds.
Highbridge brings to JP Morgan Fleming about $6 billion in Highbridge Capital Corp., a multistrategy fund that has racked up better than 16 percent annualized gains since its inception in 1992, and an additional $1 billion in two single-strategy funds that were launched in the past year. The New York City firm, which charges 2 percent of assets under management and 25 percent of the annual appreciation, should generate at least $140 million from management fees alone this year. It was up 3.34 percent for the year through September.
Staley says Highbridge is the only hedge fund company it considered buying because Dubin and Swieca -- friends since they were toddlers -- do not pull the trigger on Highbridge's investments, leaving those decisions to the portfolio managers for individual strategies. Most hedge funds are managed by and closely identified with their founders.
Under the deal, JP Morgan Fleming will form a strategic partnership with Highbridge; Dubin and Swieca, both 47, will run the firm as a separate entity, retaining its identity and culture. The pair must remain with Highbridge for at least seven years but can stay longer if they choose.
Staley wants Dubin and Swieca to expand the number of Highbridge Capital's strategies from the current seven and to increase the number of single-strategy, or sector, funds as well. Swieca says the firm is also considering a hybridlike product that he describes as something between a traditional mutual fund and a hedge fund but with lower than usual fees for a hedge fund. He won't elaborate, however.
The companies won't disclose the terms of the deal, though press reports say JP Morgan Fleming is paying $1.3 billion for its stake, with Dubin and Swieca receiving a total of $400 million to $450 million up front, and the balance due in the next five to seven years. Dubin, Swieca and Ron Resnick, their chief administrative officer and general counsel, would not comment on the terms. But Staley says that most of the consideration is tied to future investment performance. "If Highbridge does well, JP Morgan does very well and Glenn and Henry do very well," he notes.
