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Asset allocation: Hedge funds in M&A turnabout

It might make sense for hedge funds to buy traditional asset managers. When Citigroup sold off its asset management arm to Legg Mason last year, leaving the focus on its separate alternatives business, it supported the belief of many in the market that traditional asset management was becoming something of a dinosaur.

As Dean Barr, head of liquid investments at Citigroup Alternative Investments, says: “It is becoming increasingly difficult to make money in traditional asset management as products are commoditized. Basically, the only growth left is in alternatives.”

It’s surprising, therefore, that hedge fund managers, which survive on high-margin products, have begun to show an interest in buying traditional asset managers.

“Private equity funds and merchant banks are aggressively scouting for asset managers to buy”
Elizabeth Nesvold, Berkshire Capital

US alternatives group Angelo Gordon recently announced its intentions to buy traditional investment firm ForstmannLeff Associates. Angelo Gordon has about $10 billion in assets under management in distressed securities, private equity, real estate, leveraged loans and convertible arbitrage strategies, and ForstmannLeff manages US equity funds with about $3 billion in assets under management. ForstmannLeff had announced a transaction with Old Mutual Asset Management but the deal fell through after allegations of fraud surfaced relating to Refco and Phil Bennett, who formerly controlled ForstmanLeff. It is hoped the deal with Angelo Gordon will help distance ForstmannLeff from its former relationship with Refco. As hedge funds and traditional asset management converge, consultants say that similar acquisitions should be expected.

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