Multiples of egos employed is a valuation measure that may be best used when acquiring hedge funds. Not only is performance volatile and often due to luck rather than skill, but star personalities can be exceptionally difficult to retain and manage. Schroders’ purchase on Wednesday fund-of-hedge-funds manager NewFinance Capital suggests there are better ways to get exposure to growth in alternative asset classes.
During 2004 and 2005, investment banks paid dizzying prices to buy direct stakes in hedge funds. JP Morgan took a majority stake in Highbridge and Lehman Brothers invested in Ospraie. Lehman also considered buying London’s GLG Partners, in which it already had a 20 per cent stake. The trend was controversial. For one, the price range of between 15-20 per cent of funds under management was punchy, even taking into account high performance fees. In both the Highbridge and Ospraie cases managers did retain equity in the business. Still, as one industry executive puts it, “hedge funds have no terminal value” once their key individuals leave. Strategically, the spectacle of investment banks buying big customers, in order to get skills they might have in house, looked odd.
More recently, asset managers have purchased fund-of-hedge-funds managers, who help clients build portfolios. As well as Schroders, Bank of Ireland and ABN Amro Asset Management have made acquisitions. Prices are lower at 5-10 per cent of funds under management, although this reflects lower fees. But institutions get exposure to growth, with lower earnings volatility, less dependence on individual personalities, and the capacity to distribute third party products. As potential bidders for Gartmore, and its star manager Roger Guy, should worry, if you believe in a hedge fund’s performance, it is probably better to invest in it, not buy it.