M&A push expected in hedge fund arena

With private clients still licking their wounds from poor quality advice on timing, hedge fund providers and platforms have bid au revoir to the wealthy individuals who once made up their core customer base.

While pension schemes continue to diversify to reduce risk, wealthy families, who had a much greater exposure to hedge funds, are reluctant to stay invested.

“Funds of funds have taken a pasting,” laments Dale Gabbert, partner at law firm Reed Smith, advising families on setting up bespoke structures. As a result, he expects more consolidation and acquisition of alternatives platforms, which has began with the expected merger of GLG and Man Group. F&C has made a key acquisition of fund of hedge funds boutique Thames River. Along with Man Group, this is a house with preferential access to wealthy clients.

The story from F&C, a recently troubled asset manager whose shares are also coming into play, is that it has focused on institutional business until now. It plans to replace the flows which once flooded in from former parent company Friends Provident with the high-fee alternative vehicles from the new channel.

In some ways it all seems too convenient to be true. Rather than a real understanding of and empathy with clients, cynics would say hedge groups are being bought up on the cheap because they are suffering.

Let’s not forget that at the zenith of its share price, GLG was so highly regarded in the City that it was expected to re-launch itself as an investment bank, ready to compete with the powers of New York, London and Paris. And who would have thought that Thames River, Charlie Porter’s jewel, would eventually fall into the hands of a faltering funds house at an apparent bargain price?

But it’s not just the overcapacity and the sense of being yesterday’s hero which is plaguing the hedge funds fraternity. The looming regulatory burden is not lost to the great minds of London’s Mayfair.

“If you look at the AIFM Directive, it will be a bit of a death knell for the smaller boutique manager,” believes Mr Gabbert. “They are running strategies which are not terribly scaleable. They are likely to get siphoned up by the long-only investment houses which want to broaden their portfolios. These players already have a full distribution network, are authorised and will get their targets quite cheaply.”

Acquiring alternative units cheaply may be the only way in which some of the larger fund houses – outside pockets of retail business which generate “off the scale fees” – can continue to grow.