A Hedge Fund’s Marriage of Convenience

(Bloomberg Opinion) -- The appetite for low-cost passive funds is driving evolution at both ends of the scale in the asset management business. The biggest firms need to add more exotic products which can still command higher fees than their vanilla funds. And that means there’s an opportunity for smaller specialist managers to sell themselves to their larger brethren.

Sushil Wadhwani is selling the quantitative hedge-fund firm he founded after finishing his term of office as a Bank of England policy maker in 2002. Prudential Financial Inc. of the U.S., a member of the $1 trillion club, is buying London-based Wadhwani Asset Management on undisclosed terms, and will add WAM’s $1.4 billion of assets to the $128 billion its QMA unit oversees.

For QMA, which specializes in quantitative strategies for mostly U.S. clients, it’s an opportunity to extend the range of asset classes in its product offering as well as sharpen its efforts to expand overseas.

For Wadhwani, an alumnus of Tudor Investment Corp. and Goldman Sachs Group Inc., the deal lets him monetize his investment while retaining his investment autonomy. And there’s the tantalizing prospect of engaging QMA’s salesforce to expand WAM’s assets under management; finding new customers around the world is a tricky and expensive proposition for a small fund.

There’s been a trickle of similar deals. U.S.-based Neuberger Berman bought Cartesian Re earlier this month, adding more than $1 billion of insurance-linked securities such as catastrophe bonds to its $315 billion of assets. In September 2017, Neuberger bought Toronto-based quant firm Breton Hill Capital, which oversaw about $2 billion at the time. In July of that year, $14.6 billion macro hedge fund H20 Asset Management bought a majority stake in Arctic Blue Capital.

And in recent weeks, U.K. fund manager Schroders Plc approached beleaguered Swiss asset manager GAM Holding AG about buying its Systematic unit, which includes the quant fund Cantab Capital. GAM rejected the overtures, according to the Financial Times.

Hedge funds aren’t immune to the downward pressure on fees afflicting the global investment management industry. According to Hedge Fund Research, average management fees have dropped to the lowest since the research firm started tracking them in 2008, with the charge declining by more than a percentage point in the past decade to about 1.43 percent this year.

The combination of reduced fee income and the ever-increasing costs associated with regulation is starting to pose an existential threat to smaller fund managers, no matter how prestigious and loyal their existing customers are.

So expect to see more marriages of convenience between boutique firms that claim to offer a twist on the ordinary and larger firms looking to add some glamour to their product range.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Mark Gilbert is a Bloomberg Opinion columnist covering asset management. He previously was the London bureau chief for Bloomberg News. He is also the author of "Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable."

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