Blackstone's New Big Swinging Hedge Fund?
Blackstone Group LP is quietly laying plans to start a hedge fund that will make big, bold bets, an effort it hopes will eventually rival some of the largest firms in the business, according to people familiar with the plans.Miles Johnson and Harriet Agnew of the Financial Times also report, Blackstone plans its own investment platform:
The private-equity firm will fund several teams of traders with hundreds of millions of dollars to place a relatively small number of large, highly concentrated wagers, the people said. The strategy is notable now as many hedge funds are shying away from making such outsize bets.
Combined, the teams' investments will form a multistrategy hedge fund to be pitched to wealthy clients. New York-based Blackstone is confident the firm can hedge the overall risks, according to people familiar with the firm's plans.
Blackstone is aiming to rival powerhouses such as Millennium Management LLC, which has $23 billion under management; Chicago-based Citadel LLC, which has $22 billion; and the $45 billion Och-Ziff Capital Management OZM LLC in New York.
The move fills a gap for the $272 billion-asset manager, which already boasts a lineup of private-equity funds and mutual funds. Blackstone already has the world's biggest collection of so-called funds of funds that invest in other firms' hedge funds and is the biggest investor in hedge funds.
Though it bought leveraged- finance specialist GSO Capital Partners in 2008, and assumed control of its credit-focused funds, it has only twice tried to build an internal fund. Both efforts were scrapped during the financial crisis.
Hedge funds are attractive largely because of their fees. They traditionally charge a 2% annual fee and a 20% cut of the profits, double what even the priciest funds of funds command.
But while the move comes with potentially big rewards, it also comes with big risks.
"This puts them more deeply in the equity long/short business, which they are not particularly famous for," said Bob Olman, managing partner at hedge-fund-recruiting firm Alpha Search Advisory Partners in Manhasset, N.Y.
On average, hedge funds have returned 2% this year through the end of May, according to research firm HFR Inc. They are on track for the sixth consecutive year of underperforming the S&P 500, including dividends, though many funds don't purport to match equity benchmarks.
Almost 10% of hedge funds close every year, according to HFR Inc.
Other big private-equity firms are similarly diversifying beyond corporate buyouts, but some have stumbled in the hedge-fund sector. Blackstone rival KKR & Co. is dismantling one of its in-house hedge funds amid tepid fundraising and subpar performance.
The Blackstone effort is being overseen by the firm's $60 billion Alternative Asset Management arm, led by J. Tomilson Hill.
Blackstone is seeking to hire former traders pushed out by new regulations including the so-called Volcker rule, which bars banks in the U.S. from making bets with their own proprietary capital. The buyout shop also is interviewing traders at existing hedge funds who may want to start on their own.
As part of the novel structure, the traders won't be Blackstone employees but will be grouped in independent management companies.
Blackstone is in final negotiations with the first teams, who will start as soon as this fall. They will each start with as much as $500 million, including borrowed money; in total, the managers are likely to oversee billions of dollars in positions collectively before the end of the year, according to the people with knowledge of the plans.
Hedge funds have reported tepid performance in recent years, which industry executives say partly results from the rise of deep-pocketed pension funds, endowments and other institutional investors that prefer lower returns in exchange for a reduced possibility of significant losses.
In contrast, Blackstone, founded in 1985 by Stephen A. Schwarzman, is looking for stock traders that will scour the globe for four to six big bets a year that may profit on either rising or falling share prices.
In one way, Blackstone's model resembles SAC Capital Advisors LP, the fund led by Steven A. Cohen.
Blackstone's trading teams will pitch their best ideas to a group including new hire Parag Pande, formerly of closed hedge-fund firm Ziff Brothers Investments, risk officer Gideon Berger and Mr. Hill. If it likes the ideas, Blackstone will give the team additional cash to piggyback on the trades or use the ideas in other firm products.
Not dissimilarly, SAC, traders funneled their most promising pitches to Mr. Cohen's multibillion-dollar personal portfolio and received a bonus if they generated major profits for him, people familiar with the firm said.
SAC returned external money earlier this year in the wake of an insider-trading scandal.
Blackstone, the world’s largest allocator of capital to hedge funds, is preparing an overhaul of its $58bn fund of hedge funds unit that will see it compete directly with the managers in which it now invests.This isn't the best time to start your own hedge fund, but I like Blackstone's new hedge fund initiative and think it will attract many top-notch proprietary traders looking to make their mark.
Blackstone Alternative Asset Management is preparing to launch its own investment platform to allow it to hire individual hedge fund managers, placing it in direct competition with similar-style hedge funds, such as Millennium Management and Bluecrest, in which it invests.
Blackstone, which is best known as a private equity investor, will also use its fund of funds division to invest into specific longer-term investment ideas provided by outside hedge fund managers, rather than simply placing money into the hedge funds directly. Blackstone declined to comment.
Both new plans come as funds of hedge funds come under increasing strategic pressure to redefine the scope of their business models and search for higher-margin activities. Following the financial crisis investors have increasingly questioned the fees charged by funds of funds, while some larger hedge funds are sidestepping them altogether by taking money directly from institutional clients.
The plan to hire teams of its own traders will also allow Blackstone to take advantage of the multi-strategy platform that has allowed similar hedge funds such as Israel Englander’s Millennium to sign up traders that have been unable to launch their own.
Parag Pande, who joined Blackstone from Ziff Brothers as head of research a few months ago, will take up a leading role in managing the new platform, people with knowledge of the plans said, by selecting the best ideas pitched by the trading teams the company plans to hire.
While the assets managed by Blackstone Alternative Asset Management have stood up well compared with many other smaller rivals, many executives in the fund of funds sector have sought out new ways of marketing themselves to institutional investors such as pension funds.
The move by Blackstone to establish what in effect is a direct competitor with hedge funds themselves follows a failed attempt to do so by KKR, its private equity rival, which earlier this year shut down an internal hedge fund run by a former Goldman Sachs proprietary trader due to poor performance and a lack of interest from investors.
Blackstone was the largest external investor in SAC Capital, the US hedge fund run by Steven Cohen before it returned all outside money after being hit by an insider trading scandal.
Hedge funds that provide platforms and capital to traders working across various strategies have also benefited from the post-financial crisis Volker reforms in the US that in effect banned investment banks from employing people to trade using their own capital.
While some of these so-called proprietary traders went on to raise money from investors to set up their own hedge funds, many have been unable to do so because of lukewarm interest and higher regulatory requirements, meaning they have opted to join other hedge funds instead.
So why is Blackstone starting a new hedge fund when they already manage billions in funds of funds for institutional clients? Because they're not stupid. Blackstone is an alternative investment machine printing money in real estate, private equity, hedge funds and anything in between. When Blackstone sees an opportunity, they go for the jugular, which is precisely what they're doing with this new venture.
There are a few things that I'm not clear on which is why I put in a call this morning to Blackstone's Tom Hill to understand this new fund a little better. First, the WSJ article mentions that this puts them more deeply into the "long/ short equity space which they are not famous for," but it sounds like this will be a multi-strategy fund looking to place outsized bets in all asset classes, not just equities.
Bloomberg reports the team will manage about $500 million of client capital and borrowed money to make bets on and against stocks starting this year and that Blackstone has spoken with about 75 traders to add more strategies for its hedge fund without identifying how many the firm plans to hire.
Second, I am trying to understand if Blackstone, which already invests in a lot of the top funds I track every quarter, is going to be using their leverage with this new fund to gain insights on top trading ideas and place big bets.
Third, this new initiative is fraught with potential conflicts of interest, so I want to understand how Blackstone is going to navigate this thorny issue. How will the multi-strategy funds they invest with react to Blackstone new hedge fund?
But at the end of the day, Blackstone is an alternatives powerhouse and will do whatever it wants in hedge funds. They know their traditional fund of funds business has no long-term growth, despite the institutional love affair with hedge funds, and they are looking to diversify into a new product where they can scrap the second layer of fees and attract pension funds, sovereign wealth funds, and high net worth clients.
Will this new venture succeed? That all depends on who they attract to this new platform and how they will manage this new product, which will be grouped in independent management companies to limit liability risk to Blackstone.
Interestingly, I was approached by a New York headhunter a while ago to take part in this new fund. A U.S. pension fund client of Blackstone recommended me, but after speaking with me, the headhunter quickly realized I don't have the pedigree that Blackstone is looking for (Goldman Sachs, hedge fund experience, etc.). It's too bad because I've got some amazing talent to recommend to Tom Hill and Parag Pande and I have solid experience investing in L/S Equity, Global Macro, and CTAs. And if it's one thing I love, it's analyzing portfolios and markets and recommending outsized bets in stocks, currencies and bonds.
Oh well, Blackstone's loss is your gain. Please remember to donate and/or subscribe to my blog at the top right-hand side and show your appreciation for the work I do.
Below, David Rubenstein, The Carlyle Group co-founder, discusses the comeback of hedge funds from the Great Recession. Rubenstein says the funds of funds business is not dead.
He's right and wrong. As I predicted after the crisis, most funds of funds are dead but the big shops still survive catering mostly to U.S. public pension funds gambling on alternatives. One thing is for sure, the era of fee compression is just getting started and this will impact everyone, including Blackstone and Carlyle.
Postscript: The WSJ reports that Blackstone has hired longtime Goldman Sachs banker Marc Pillemer to help the firm in its effort to buy stakes in hedge-fund firms.
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