A growing band of independent hedge fund executives are returning to Wall Street, where many of them first cut their teeth, as the search for long term capital, the desire to build more than a short-term money-making machine and the need for resources force them to reconsider their career paths.
At the same time, investment banks and other financial institutions are helping to push this trend by either investing directly in hedge funds or just poaching individual executives. A prominent example of the latter is Morgan Stanley executive Stuart Hendel, who late last year returned to his alma mater as global head of prime brokerage after a stint as chief operating officer for Eton Park Capital Management, the hedge fund set up by former Goldman Sachs star Eric Mindich.
But hedge fund managers such as Mr Hendel are used to being paid very well, and banks are increasingly electing to take stakes in hedge fund companies, or buy them outright, rather than headhunting the individuals.
"If Wall Street wants to attract these people in a way that is acceptable to shareholders and boards, they are not going to do it by paying hedge fund-like salaries – so they are resorting to acquisitions," said one New York-based hedge fund banker.
The Wall Street giants then offer these talents not just the backing of a large organisation, but in some cases senior roles at group level to lure them into staying.
This is how it has worked out for Gil Caffray. The vice-chairman of FrontPoint Partners, a hedge fund conglomerate, is now also vice-chairman of Morgan Stanley's fund management unit after the investment bank bought his company late last year. At about the same time, Morgan Stanley also bought a stake in Avenue Capital, one of the largest hedge fund groups, paying about $300m for a 15-20 per cent interest, and built a stake in London-based Lansdowne Partners.
Mr Caffray says Morgan Stanley convinced FrontPoint's management of its commitment to building a world-class alternative investment franchise, with FrontPoint as a cornerstone of that effort.
Mr Caffray is a former head trader at Julian Robertson's Tiger Management, the world's largest hedge fund in the late 1990s, and remains portfolio manager of FrontPoint's multi-strategy fund.
He adds that the Morgan Stanley deal has made it easier for FrontPoint to grow. "It does give us the ability to attract and to retain very high quality investment teams."
Stu Bohart, the head of alternative investments at Morgan Stanley Investment Management says FrontPoint's investment expertise and distinct set of strategies provide Morgan Stanley's existing clients with a broader range of alternative investments than they had access to before.
He also admits that attracting the best investment staff and retaining them had been an important factor in the deal.
The FrontPoint purchase is part of Morgan Stanley chief executive John Mack's efforts to bolster the Wall Street bank's alternative asset management division, which has lagged behind competitors such as Goldman Sachs.
Apart from Mr Caffray, other members of FrontPoint's management team have also assumed leadership roles within Morgan Stanley.
Other investment banks have been making similar plays to boost their involvement in the hedge fund business. Recently, Lehman Brothers bought 20 per cent of DE Shaw, following JPMorgan's purchase of a stake in Highbridge Capital Management and a long string of other stake acquisitions.
Vikram Pandit, who left Morgan Stanley in 2005 following a leadership struggle, last month agreed to sell his hedge fund, Old Lane Partners, to Citigroup – taking the post of chief executive of Citigroup's alternative investment arm in the process.
"This was not just about getting a good deal in terms of the extremely high price Citigroup paid for Old Lane," says one hedge fund industry source.
Sources close to Mr Pandit say one of the main reasons behind his decision to sell his fund after only a year in business was the need for resources and how much better a company such as Old Lane can function without having to pay for Wall Street services in a piecemeal fashion.
Some observers say Mr Pandit himself is more suited to an investment banking role.
"He likes the complexity of managing a large organisation. Hedge funds are generally not complex organisations at all. He is a tremendously talented bank executive who was actually a fairly run-of-the-mill hedge fund manager," says one.
Citigroup said on Wednesday that it had agreed to buy financial services provider Bisys Group for $1.45bn to offer still more services to hedge funds, mutual funds and private equity firms.
Bigger hedge funds increasingly feel the need for a permanent base of capital – one factor behind the recent stock market listing of Fortress Investment Group, the US hedge fund firm that made a spectacular debut in New York.
The movement of hedge fund executives and their companies back to Wall Street also comes as hedge funds and investment banks converge on common territory.
Hedge funds, for example, are increasingly viewed by bankers as partners in the capital markets, particularly in buy-out deals.
And some investments banks are increasingly resembling hedge funds in certain areas. Goldman Sachs, for instance, is often said to be a hedge fund dressed up as an investment bank. Most of the larger investment banks have proprietary trading desks that are, in essence, internal hedge funds.
One fund of hedge funds manager, points out: "You are certainly seeing more convergence between hedge funds and Wall Street, be that through acquisitions of hedge funds by Wall Street firms, staff moving from one to the other, or the two working in concert on restructuring and turnarounds."
Copyright 2007 Financial Times
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