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Hedge funds: M&A activity is ‘a natural progression’

Recent flurries in M&A in the hedge fund sector have not come out of the blue, says Ted Gooden, partner at M&A adviser to financial companies Berkshire Capital, and more are to be expected in 2007.

Morgan Stanley recently announced that it had bought parts of hedge fund managers Avenue Capital Group and Lansdowne Partners, and all of FrontPoint Partners. Fortis Investments is the latest to join the M&A train, taking a 70% stake in fund of hedge funds Cadogan Partners.

“Lots of conversations started in 2005 and this year, and there are tremendous negotiations going on right now [regarding acquisitions of hedge funds and funds of hedge funds],” says Gooden. In 2005, there were four acquisitions of hedge funds, and this year to date there have already been 13 according to Berkshire Capital’s research. Including acquisitions of funds of hedge funds, there were 10 deals in 2005, and 24 this year.

Gooden says it is a natural progression in the industry: “While the hedge fund industry has been expanding rapidly, there really hasn’t been a need for managers to partner with larger financial institutions. If they were good, they could raise capital. But we are no longer seeing such rapid growth in assets being raised, and performance is becoming more difficult to achieve. Hedge funds are now more responsive to buyers.”

Funds of funds

It is a similar story with funds of hedge funds.

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