Hedge fund investment firms PAAMCO and KKR Prisma said on Monday they were merging, signaling more consolidation in the so-called funds of funds sector as assets continue to contract and clients demand more.
The new firm, PAAMCO Prisma Holdings, plans to offer alternative investment strategies for individual investors through mutual funds, exchange traded funds and closed-end funds, tapping into a hot segment at a time when less-affluent investors want to diversify their portfolios with funds that used to be reserved for the super wealthy.
PAAMCO Prisma Holdings will have more than $30 billion in assets and its employees will own roughly 60 percent of the new firm. Global investment firm KKR (KKR.N) remains a strategic partner with a 39.9 percent stake.
Jane Buchan, who co-founded Irvine, California-based PAAMCO, and Girish Reddy, who co-founded New York-based KKR Prisma, will jointly run the new company. "This transformative step will enable us to provide added scale benefits, wider investment options and faster innovation to all of our investors," Buchan said. Reddy sold Prisma to KKR in 2012.
The move underscores how funds-of-funds are scrambling to stay relevant as many original clients, including pension funds, are protesting high fees and bypassing these middlemen.
Funds of hedge funds traditionally charged an annual management fee of up to 1 percent of an investor's assets and a performance fee of up to 10 percent to pick individual hedge funds. Those charges were layered on top of the individual hedge funds' 2 percent management fee and 20 percent performance fee.
Performance has been lackluster, with the HFRI Fund of funds composite index inching up only 0.17 percent last year. Assets stood at $632.8 billion in late 2016, down from $895 billion a year earlier.
Last year the Arden Alternative Strategies Fund was liquidated.
PAAMCO and Prisma said their brands and funds will continue to exist side-by-side in the new firm.
(Reporting by Svea Herbst-Bayliss in Boston and John Benny in Bengaluru; Editing by Savio D'Souza and Dan Grebler)