* Hedge fund boss McCaffery says industry to consolidate
* Fund of hedge funds face falling assets, fees
By Tommy Wilkes
LONDON, Sept 20 Aberdeen Asset Management
said there will be a further wave of consolidation in
the fund of hedge funds industry, with managers who run less
than $3 billion facing a struggle to survive amid shrinking
assets and rising costs.
Once a fast-growing source of capital for hedge funds, fund
of funds - which try to pick the best managers and reduce risk
by holding a basket of funds - have been hurt by criticism about
their high fees and poor returns.
Many in the $627 billion sector are still to recover from
redemptions in the financial crisis, forcing a round of
dealmaking as bigger players snap up smaller, struggling rivals.
On Wednesday, U.S.-based K2 Advisors became the latest
player to sell out after Franklin Resources said it
would buy a majority stake.
That followed private equity group Kohlberg Kravis Robert's
buyout of Prisma Capital Partners in June, and Man
Group's May purchase of FRM.
"What you have is a number of businesses over the years
which have been quite successful, have very good revenues, and
now they are finding their performance is being compromised and
their high-water mark is out here," Andrew McCaffery, Global
Head of Hedge Funds at Aberdeen, told Reuters in an interview.
High-water marks are the level at which these investors can
start to charge their clients much-needed performance fees, and
McCaffery was indicating that many funds are some way from
returning to these levels.
"Business models when you have got $1, $2, $3 billion are
severely compromised when you are a single company."
Aberdeen runs more than $4.5 billion in fund of hedge fund
assets, much of it gained after the FTSE 100-listed group bought
the non-core asset management business from Britain's Royal Bank
of Scotland in 2010.
Like many managers, hedge fund are a relatively small part
of its overall business - Aberdeen runs 182 billion pounds ($295
billion). It is keen to expand into alternative assets as
investors turn away from traditional bonds and stocks.
With fund-of-funds on the ropes - many have also been hit by
outflows as large clients choose to invest directly in hedge
funds, thus cutting out a layer of fees - McCaffery said owners
now needed to accept lower valuations for their businesses.
He described Man's purchase of FRM as a potential
"game-changer". Under the deal Man pays nothing upfront, with
the price dependent on asset retention and performance fees
"In some cases the problem is there may be no price for a
deal, because if they carry on like that they undermine the
business...if people leave, assets leave, and if they both leave
together it's a very different situation," he said.
Among those mulling a sale is celebrity financier Arpad
Busson, but EIM, the hedge fund investor he founded in the
1990s, could struggle to find buyers.
McCaffery said Aberdeen's future growth - he aims to grow
hedge fund assets by 50 percent over the next three to four
years - will likely come from institutions demanding tailored
services versus the high-net worth clients who buy readymade
Aberdeen's flagship fund of hedge funds have struggled to
attract inflows since it bought them from RBS, which tended to
market them to the client base at its private bank, Coutts.
The Aberdeen Orbita Global Opportunities Strategy has lost
around 25 percent of its assets since 2010, for example, but
McCaffery said the focus is now on getting its funds on more
wealth manager platforms and private bank lists.
"The business wasn't really out there being marketed or
managing money in an extensive way, but that's starting to
change," he said.