Did you see the article in the Newspaper of Record about the impending boom in hedge fund mergers? It seems so far this year the dollar amount is up 44.4 percent to $7.75 billion, from last year. Don’t bet on some larger hedge fund merger wave. The prospect of a deal boom actually makes little sense.
Sure, there have been a few high-profile deals, including MAN Group’s acquisition of GLG Partners for $1.6 billion, or more than 20 percent of this year’s total value.
And yes, TPG-Axon Capital Management merged with Montrica Investment Management.
Supposedly, the hedge fund industry has drawn attention from investment bankers, who would peddle almost anything if they thought it would generate a fat fee.
However, hedge funds are perhaps the least conducive industry in the capitalist world for mergers.
Why? For one thing there is the obvious age-old risk: The most important assets go down the elevator or walk out the door every evening.
This issue is more acutely apt in the hedge fund world because—for all the great staff many of these firms assemble—at most firms the only person who really, truly matters is the one whose name is affixed to the door.
Think about it: How appealing would Tudor Investment be to an acquirer without Paul Tudor Jones II? Or Caxton Corp without Bruce Kovner? These two are among the only humans to ever go more than 20 straight years without losing money. If you bought their firms and their great pros but the two founders subsequently left, can you confidently expect this winning streak to persist? I wouldn’t.
And let’s say a would-be acquirer acknowledges this risk, but is attracted to the hedge fund firm’s top-notch analysts, managers and traders as well as its blue chip roster of clients.
Still makes no sense. Once the change of control takes place, and once the person whose name on the door leaves, there is no reason to expect the clients to remain.
This is not like two paper companies or two banks merging. Hedge funds are the ultimate people business.
Of course, you can point to JPMorgan’s very successful acquisition of Highbridge Capital Management as proof that mergers work. But, this is a unique situation.
For one thing, Highbridge co-founders Glenn Dubin and Henry Swieca remained for five years after JPMorgan bought its initial majority piece. And Dubin was especially active and still plays a key role at the firm.
Also, Dubin and Swieca smartly did not name their firm after themselves. Perhaps more importantly, they were not the ones who pulled the trigger on a daily basis at their multistrategy fund.
So, when JPMorgan decided to buy Highbridge, they did not have to worry that the people who were solely responsible for the long-term record would leave, as, say, a would-be acquirer of Julian Robertson’s Tiger Management would have feared had they bought the firm a decade ago before it was shut down. Or, if a potential acquirer tries to buy Caxton or Tudor or a number of the other very successful hedge fund firms that are currently run by the founders who are now in their 50s and 60s.
Don’t get me wrong. Many hedge fund firms are trying to grow. And in fact, HFR has pointed out that most of the new money flowing into hedge funds this year are going to firms with more than $5 billion in assets. So, a number of firms feel an urge to expand.
However, they are trying to grow in different ways. A number of the multi-strategy firms are looking for top-notch teams to lift out of other organizations. Tudor already did this a few months ago.
KKR is said to be hiring a number of proprietary traders from Goldman Sachs to head up a stock trading group.
Others such as Citadel are looking to seed fledgling managers.
However, none of these expansion strategies require the intervention of a fee-starved investment banker, which means the ultimate deal will be made for all of the right reasons.
