Hedge Fund M&A 2010

Hedge Fund Consolidation through M&A in 2010

The hedge fund industry is expected to go through a consolidation, with hedge fund firms like Man Group looking to expand by purchasing other hedge funds.  But this consolidation may not be as easy as expected, as hedge fund mergers and acquisitions involve a lot of risk and it is tough to build up support to acquire an underperforming manager and even tougher to pick up a well-performing manager who will be hesitant to sacrifice his fund's independence.  However, some investment banks are likely to expand their hedge fund businesses with key acquisitions.

But merger risks at hedge funds are huge, which is why they are seldom attempted. As entrepreneurial businesses, names above doors matter, and talent often walks. As long as returns are good and managers rake in high performance fees, they are loath to give up their independence. Nobody wants to buy weak and underperforming managers.

Expectations that 2008's poor performance would force smaller hedge funds to seek the shelter of bigger owners proved wide of the mark. With no guarantee of hanging on to acquired assets under management, the businesses are very hard to value. For hedge funds, a better strategy may be to hire the talent and seed new funds themselves.

If there is deal activity in 2010, it is likely to involve banks. Credit Suisse is still keen to expand its alternative-investment business, building on existing successful partnerships with hedge funds, according to someone familiar with the situation. Source

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