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Blackstone sees ‘buyer’s market’ for hedge funds

Date: Friday, October 22, 2010
Author: Alistair Barr, MarketWatch

Blackstone Group LP is looking to back as many as 15 new hedge funds as the private-equity giant tries to take advantage of a wave of emerging managers and a lack of capital for start-ups in the $1.8 trillion industry.

One manager in Blackstone’s sights is John Wu, a former portfolio manager at Kingdon Capital Management, a big New York-based hedge-fund firm run by Mark Kingdon.

Wu left Kingdon earlier this year and is launching a new global hedge fund called Sureview with backing from Blackstone, according to three people familiar with the situation.

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Wu may get at least $100 million in so-called seed money from a part of Blackstone /quotes/comstock/13*!bx/quotes/nls/bx (BX 13.75, +0.37, +2.77%)  that specializes in backing start-up hedge funds.

He isn’t the only trader looking to start a new fund. The Volcker rule, part of a new financial law in the United States, limits banks’ ability to trade with their own money — known as proprietary, or prop, trading. That’s encouraging some prop traders to leave and start their own hedge funds.

While there’s a steady supply of potential new managers, the 2008 financial crisis left investors wary of backing start-ups and cut the amount of capital available for such efforts. Read about how difficult it is to launch a new fund.

This has created a “buyer’s market” for investors who seed new hedge funds, Blackstone said in a confidential May presentation obtained recently by MarketWatch.

Fewer competitors, different model

Seeding involves investing money in new hedge funds from the get-go. Backers sometimes take equity stakes in these hedge-fund businesses and share fee revenue.

Yet the practice has a mixed reputation, because when the industry was booming firms that wanted to seed were only able to back managers who couldn’t raise money elsewhere. But now that many investors are wary of backing new managers, that’s created a potential opportunity.

“Blackstone believes that it has fewer seeding competitors than in the past, which may result in an attractive period for seeding a portfolio of managers,” the firm said in its May presentation.

When the industry was booming, firms that wanted to seed hedge funds were only able to back managers who couldn’t raise money elsewhere.

Blackstone has been raising money for a new vehicle called Strategic Alliance Fund II, or SAF II, which will seed 10 to 15 new hedge-fund firms.

Blackstone aimed to raise as much as $1.5 billion by the second half of this year, according to a July presentation obtained by MarketWatch.

The average investment in each new fund will be $100 million to $150 million, but Blackstone may put as much as $250 million with a few top traders, the presentation said.