The Blackstone Group L.P. (NYSE:BX), with $46.2 billion in assets under management, is planning to come up with a multibillion-dollar fund that will buy stakes in hedge fund managers in the secondary market. The multibillion-dollar fund will provide an exit opportunity for banks, insurers, and other financial institutions that need buyers willing to take on what are particularly illiquid investments, amid disappointing fund performance and regulation, writes Greg Roumeliotis and Katya Wachtel, from Reuters.
Though no size target for the fund has been finalized, it is believed to attract between $2 billion and $3 billion. As per the report, The Blackstone Group L.P. (NYSE:BX) will soon come up with the marketing of the fund, expecting over 20 percent in returns.
The upcoming fund is the latest example of diversified private equity firms moving to tap the traditional providers of capital on Wall Street that are taking a step back. Earlier in July, KKR & Co. L.P. (NYSE:KKR) launched a new capital markets business, targeting middle-market companies. The new fund from The Blackstone Group L.P. (NYSE:BX) will cater to a niche space with few players, like Goldman Sachs Group, Inc.(NYSE:GS)’s GS.N., Petershill fund, and its main competitor in the segment will be Neuberger Berman Group LLC, whose Dyal fund also targets hedge fund GP stakes in the secondary market.
“We have a fund that seeds new hedge fund managers, and by doing that owns a piece of the GP, and we have a new product that we are working on, which we will be announcing shortly but haven’t announced yet,” The Blackstone Group L.P. (NYSE:BX) President, Tony James, told analysts on a conference call last week, without elaborating.
The hedge fund industry is witnessing a major change in investor base, along with growth in size. Global assets in hedge funds now top $2 trillion, far more than the $200 billion or so run in the mid-1990s. The new source of money for the Hedge funds is now pension funds and insurance companies, which unlike the traditional, rich clients, want managers to go easy on risky trades.
Unlike traditional investment funds, which only bet on prices rising, Hedge Funds exploit and profit from inefficiencies in markets and enjoy the privilege of wagering on prices falling. But those inefficiencies are rapidly diminishing, as more capital is chasing the same opportunities, making it harder for managers to earn returns above the market.
“High net worth investors went into hedge funds in many cases because they personally knew the manager, they wanted significant returns, and weren’t hugely concerned with monthly numbers or volatility,” Anita Nemes, Global Head of Capital Introduction at Deutsche Bank AG (ETR:DBK) (FRA:DBK) (NYSE:DB) (DBKGn.DE) said. “Institutional investors want uncorrelated returns and low volatility from hedge funds. (They) want different things”.
The investment objectives for the new breed of investors is to mitigate against falls in their other investments, without assuming big risks looking for huge potential profits. To achieve the new objectives; funds are forced to curb some of their more aggressive tactics, like using lots of borrowed money to amplify the scale of trades. According to Hedge Fund Research, the annualized return of the average fund over the past 10 years is 6.77 percent, compared to the 31 percent return enjoyed in the Vintage years, like 1999. The average hedge fund is up 3.9 percent over the past three years, under-performing the S&P 500, which is up some 30 percent.