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BlackRock May Purchase Stakes in Startup Hedge-Fund Managers

Date: Tuesday, June 19, 2007
Author: David Clarke and Andrei Postelnicu, Bloomberg.com

BlackRock Inc., the largest publicly traded U.S. asset manager, is considering buying minority stakes in hedge-fund managers to raise profit from one of the fastest growing areas of asset management.

BlackRock, whose existing hedge funds are overseen internally, plans to start buying into startup managers within 12 months, said Howard Berkowitz, head of the hedge-fund group. The New York-based company, which took over Merrill Lynch & Co.'s investment arm last year, manages $1.15 trillion in assets.

``If we find some really good young managers then we will be on the ground floor and be able to get a great rate of return,'' he said in an interview at the GAIM conference in Monaco today.

Hedge funds attracted $60 billion in new money in the first quarter, bringing industry assets to $1.57 trillion, according to Chicago-based Hedge Fund Research Inc. BlackRock is betting that owning stakes in the companies, which tend to charge higher fees than conventional managers, will boost returns faster than just investing in their funds.

BlackRock will offer the hedge funds it buys the use of its trading and administration facilities, Berkowitz said. The company already has relationships with about 80 external hedge- fund managers through its funds-of-funds unit and probably won't take stakes in businesses it has already invested in, he said.

BlackRock joins other companies trying to tap gains from hedge funds. Morgan Stanley last year bought a 19 percent stake in London-based Lansdowne Partners LP and JPMorgan Chase & Co., agreed to buy control of Highbridge Capital Management in 2004. Resolution Asset Management in Glasgow, Scotland, has grown assets through starting joint-venture fund companies.

`Risk of Blowup'

Asset managers and investment bankers are keen to gain access for their wealthy clients to funds that may otherwise be closed to them, said Kevin Pakenham, an investment banker at Putnam Lovell NBF Securities, which specializes in advising on asset-management acquisitions. Investment banks can also sweep up business for their prime-brokerage units, which offer services to hedge funds, by buying stakes in management companies, he said.

``It's the cutting edge of what capital markets are doing and they have got to be there,'' said Pakenham, who declined to give details of his advisory mandates. ``There is of course a risk of a blowup for some of these hedge funds.''

Hedge funds are mostly private and unregulated pools of capital where managers can buy or sell any assets, participating substantially in the profits of the money invested. They tend to take bigger bets than conventional funds. Last year Greenwich, Connecticut-based Amaranth Advisors LLC collapsed with $6.6 billion of losses in the industry's worst-ever meltdown.

`Need a Parent'

Resolution Asset Management has raised $1 billion in its first joint hedge-fund venture after two years of operation, according to Jonathan Polin, who is in charge of institutional sales at the fund unit of insurer Resolution Plc. It's planning to add another seven hedge- and traditional-fund joint ventures to its three existing businesses within 18 months, he said.

Resolution takes a 50 percent stake in the companies and helps with the management of the businesses, allowing the fund managers to concentrate on overseeing assets, Polin said.

``I have met 70 fund managers in the past year,'' he said. ``They need to have a big parent behind them.''

To contact the reporter on this story: Andrei Postelnicu in London at apostelnicu@bloomberg.net ; David Clarke in Edinburgh at dclarke3@bloomberg.net .