Friday, August 04, 2006

Buy Out Firms to add Hedge Funds

By Edward Evans and Ambereen Choudhury

LONDON Carlyle Group and Blackstone Group, two U.S. buyout firms that announced more than $30 billion worth of takeovers in the past 12 months, are starting hedge funds as the industry grows at the fastest rate in three years.

Carlyle is close to hiring Ralph Reynolds, who is based in New York as Deutsche Bank's global head of proprietary trading, to run a new hedge fund unit, The Wall Street Journal reported Tuesday, citing people familiar with the decision. Blackstone recruited Manish Mittal in April from Perry Capital of New York to run a planned $1 billion hedge fund.

Leveraged buyout firms are searching for new ways to increase profit as financing costs climb and competition between firms for the same assets intensifies. Investors pumped $42.1 billion into hedge funds during the second quarter, the biggest quarterly inflow since at least 2003, according to data compiled by Hedge Fund Research in Chicago.

"Why limit yourself to private equity?" said John Godden, chief executive officer of IGS Group, a hedge fund advisory firm based in London. "From a commercial perspective, they are going to be able to raise more money and get more fees."

During an interview by telephone from his office in New York, Reynolds said that he was still an employee of Deutsche Bank. He declined further comment.

David Rubenstein, co-founder of Carlyle, which oversees about $42 billion of private-equity funds, said earlier this year that the company was considering opening hedge funds. By creating hedge funds, the firm based in Washington can expand its range of investments in stocks, bonds and commodities.

"It would be quite some time before our hedge fund business could become quite that big," Rubenstein said in January. "It's clear there's a fair amount of capital looking for good returns and hedge funds offer a different kind of risk to private-equity funds."

Carlyle in 2003 sold its hedge fund unit, which had about $600 million of assets, to the division's managers after two years in the business.

Texas Pacific Group, a U.S. buyout firm, has a partnership with TPG-Axon Capital Management, a $5.8 billion hedge fund started in 2004 by former Goldman Sachs Group partner Dinakar Singh.

Hedge funds returned 6.2 percent in the first half of the year, compared with 2.7 percent for the Standard & Poor's 500-stock index, a benchmark for U.S. stocks, according to Hedge Fund Research. Industry assets have more than doubled to about $1.3 trillion since 2000.

Hedge funds are designed for investors with at least $1 million, and endeavor to make money whether financial markets rise or fall. They can use leverage to help increase gains and they can sell short, or borrow securities and immediately sell them with the hope of buying them back at a lower price.

They typically charge an annual fee equal to about 2 percent of assets and the fund managers keep 20 percent of any investment gains. Leveraged buyout funds tend to charge investors an annual management fee of 1.5 percent. They also keep 20 percent of the profit, usually once the fund has returned all the cash it invested, a process that can take years.

Buyout firms use a mix of their funds and debt to pay for takeovers. They typically seek to expand companies or improve performance before selling them within five years to other funds or investors through stock offerings.

Carlyle forming team for the Middle East

NEW YORK: Carlyle Group, manager of the biggest U.S. buyout fund, wants to start a Middle East team to invest in the oil-rich region, which is flush with cash after prices almost quadrupled in the past 4½ years.

The firm has not decided where it would base the team or how many people it might hire, a spokesman, Chris Ullman, said. He declined to comment on whether the company, which is based in Washington, would raise a Middle East buyout fund.

"We're looking to establish a Middle East investment team, and for someone to head that office," Ullman said during an interview Monday.

The Gulf economies have boomed as oil prices have risen to more than $74 a barrel from under $20 at the end of 2001. Abu Dhabi, the largest sheikdom in the United Arab Emirates and the location of most of the federation's crude reserves, had oil revenue of more than $31 billion last year, according to Standard Chartered. $@

Mellon starts unit for wealthy Britons

EDINBURGH: Mellon Financial, which administers about $4.9 trillion in client assets, said Tuesday that it was starting a new unit for wealthy British customers, its first such division outside the United States.

Jim McEleney will run the unit, which will seek to administer assets of families that have at least $50 million to invest. Many wealthy families have employees who administer their assets or private banks that invest on their behalf.

"There are about 1,000 families in that market in the U.K.," McEleney said during a telephone interview Tuesday from his office in London. "This also gives us a springboard into Europe."

Fund administration and custody services cover all aspects of fund management other than investment decisions. Fees typically are much lower than for managing money and the contracts as a result tend to cover larger amounts of assets. Mellon's U.S. business administering assets for wealthy clients has about 130 clients with $32 billion of assets. $@ - David Clarke

$4.6 billion withdrawn from Fidelity in June

BOSTON: Fidelity Investments, the largest mutual fund company, had $4.6 billion in investor withdrawals in June, the most among peers, data from Financial Research show.

Investors removed $1.1 billion from the company's stock and bond funds in May. Industry redemptions were $2.7 billion, compared with net inflows of $5.3 billion in May, according to Financial Research, also based in Boston.

Investors pulled money out of stock and bond funds after the global markets tumbled in May on concern that rising interest rates would stem economic growth. The Standard & Poor's 500- stock index has dropped 3.6 percent after reaching a peak in early May.

State Street Global Advisors led sales in June, pulling $5.9 billion into its exchange-traded funds. American Funds, a unit of Capital Group of Los Angeles, was in second place, gathering a net $3.1 billion.

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