Fortis Investments, Cadogan to Merge Hedge Fund Units

Date: Friday, November 10, 2006
Author: Joana Quintanilha and Andrei Postelnicu, Bloomberg.com

Nov. 10 (Bloomberg) -- Fortis, Belgium's biggest financial- services company, bought 70 percent of Cadogan Management LLC to create a hedge-fund management business with about $3.7 billion in assets.

The new entity, which will retain the Cadogan name, will combine the New York-based firm's $2 billion in assets with Fortis Investment Management Inc.'s $1.7 billion, according to an e-mailed statement. Terms of the transaction weren't disclosed.

The deal continues a trend of banks investing in hedge-fund management firms to benefit from increased inflows of capital in the $1.3 trillion industry. It also reflects the goal of Fortis' Chief Executive Officer Jean-Paul Votron to generate 30 percent of the company's profits outside home markets. Fortis currently generates 20 percent of profit outside the Benelux region following acquisitions in Turkey and the U.K.

``This acquisition is in line with Fortis's expansion strategy and allows it to buy expertise in a specialized market,'' said Gert-Jaap Kraan, an analyst at Theodoor Gilissen in Amsterdam, who has a ``buy'' rating on Fortis stock.

The purchase of the Cadogan stake more than doubles Fortis' hedge-fund assets, said Will Braman, U.S. CEO of Fortis Investment Management, in a phone interview today. The new business will consist of funds that invest in combination of other hedge funds in order to make money in rising and falling markets alike.

Other Approaches

Cadogan CEO Stuart Leaf said he turned down ``quite a few'' approaches from other banks. He added that the transaction allows ``huge amounts of autonomy'' as well as access to Fortis' network of offices and clients.

Fortis, which is based in Brussels and the Dutch city of Utrecht, said in the statement that the transaction will have no impact on the company's net profit and is expected to close within 90 days.

The transaction ``gives us real critical mass in an asset class which is increasingly in demand by institutional investors,'' said Richard Wohanka, global chief executive officer of Fortis Investments.

Hedge funds attracted $44.5 billion in capital in the third quarter, the most for a three-month stretch since at least 2003, according to Chicago-based Hedge Fund Research Inc.

Hedge funds returned an average of 1 percent from March 31 to Sept. 30, HFR data show. That compares with 4 percent for the Standard & Poor's 500 Index, a broad measure of U.S. equities, and 3.7 percent by the Lehman Brothers Aggregate Bond Index.

American Clients

Cadogan Management LLC, named after a London square where its founder Stuart Leaf went to school, started in 1994. More than half of its clients are in North America, while 35 percent of them are in Europe and the remainder in Asia.

The Fortis transaction comes a week after Morgan Stanley bought parts of hedge-fund managers Avenue Capital Group and Lansdowne Partners LP, and all of FrontPoint Partners LLC. Other firms that have entered the hedge-fund industry include JPMorgan Chase & Co., which acquired control of Highbridge Capital Management, an $8 billion hedge-fund manager, about two years ago. Lehman Brothers Holdings Inc. agreed last year to buy 20 percent of Dwight Anderson's Ospraie Management LP, which oversees $2 billion.

Hedge funds are mostly unregistered pools of capital that allow their managers to participate significantly in the gain or loss of the money invested.

To contact the reporters on this story: Andrei Postelnicu in London at apostelnicu@bloomberg.net ; Joana Quintanilha in Amsterdam at quintanilha@bloomberg.net