Nothing indicates better how a business has matured than when established forces start buying and upstarts are willing to sell.
That's where the hedge fund business now stands. JPMorgan Chase has bought a majority stake in Highbridge and Lehman Brothers is considering adding to its 20% stake in GLG Partners. European banks have also been making this move.
By being one of the first to act JPMorgan, no stranger to losing staff to hedge funds, has had the pick of the bunch, and settled on a highly regarded firm. Highbridge has $6.6 billion in assets, runs seven strategies, relies at least as much on technology as on its staff, and has a very good track record.
On one level it's the latest response from brokers and asset managers who for years have been struggling to stem the drain of talented prop traders, portfolio managers and researchers leaving for hedge funds, which usually pay more. Until now the only serious option has been to give departing employees seed capital and to profit from their success.
It is also another step in the process of hedge funds being accepted as investment institutions. As more institutional pension, money management and insurance funds put assets into hedge funds, they demand more transparency and more risk management. That has spurred growth in hedge funds. It has also made them a more central part of the investment process. As Euromoney argued in August and September, this has contributed to opportunities drying up much more quickly in several strategies as so many more players wait to exploit them.
This makes it unclear what JPMorgan, and others who strike similar deals, will get in the longer term. There is already pressure on hedge funds to drop fees, and others are voicing doubts about how effective a hedge fund can be the larger it becomes. Outsized returns are unlikely if the performance of the last year is the new reality and not an aberration.
What is clear, though, is that JPMorgan has bought one of the best. That's good business sense, and the fact that it's a hedge fund is little more than noise.