Arpad Busson, who rode a global boom in hedge funds to become one of the biggest investors in the industry before the 2008 financial crisis, has held talks to sell his EIM SA fund-of-funds firm after assets shrank, four people with knowledge of the matter said.
Executives at EIM are discussing a sale to another asset manager because the amount the firm manages has dwindled by more than 50 percent from a peak of more than $14 billion before the crisis, said the people, who declined to be identified because the talks are private. With fees for managing client money falling, EIM is finding it harder to profit from a business that still employs more than 100 people and has offices in cities including London, New York and Paris, the people said.
EIM’s talks highlight the decline of so-called fund-of- hedge-funds, which placed billions of dollars on behalf of their clients with top money managers such as John Paulson, Alan Howard and Louis Bacon. Pension funds, sovereign wealth funds and insurers are increasingly bypassing funds-of-funds after the companies lost money for investors in 2008 and placed assets with Bernard Madoff, later convicted of fraud.
“Fund-of-funds are no longer gatekeepers and the effectiveness of their risk management has been called into question,” said Neil Campbell, London-based head of alternative investments at brokerage Tullett Prebon Plc. “The original reasons why investors were willing to pay an extra layer of fees now seem hopelessly flawed.”
Busson, 49, started Nyon, Switzerland-based EIM in 1992 after establishing himself in the hedge fund industry by helping raise money from European clients for New York-based firms, including Bacon’s Moore Capital Management LLC and Paul Tudor Jones’s Tudor Investment Corp. EIM and other fund-of-funds charge fees, typically 1 percent of assets under management and 10 percent of any investment gains, to pick hedge funds for clients. The charges come in addition to the 2 percent of assets and 20 percent of gains that go to the underlying hedge funds.
Busson would want to remain with EIM if it is sold to another company, according to a person briefed on his thinking who spoke on condition of anonymity.
“EIM is constantly looking at opportunities to grow its asset base and its operations,” said Neil Bennett, a spokesman for the firm in London. He declined to comment on sale talks.
Busson is also known for his romantic relationships with super model Elle Macpherson and now actress Uma Thurman, and for an annual hedge fund gala he throws in London to raise money for charity that was attended last year by Prince William and the Duchess of Cambridge. A sale would mark a change in course for Busson, who said two years ago that he wanted to buy a competitor and was reviewing three funds-of-funds for a potential acquisition.
Funds-of-funds that lost money in 2008 have struggled to claw back gains, making it difficult to earn the more lucrative performance fees on the assets they manage. Firms lost an average of 21.4 percent in 2008, before rising 11.5 percent in 2009 and gaining 5.7 percent in 2010, according to Chicago-based Hedge Fund Research Inc. The average fund-of-funds declined 5.7 percent last year, before increasing 3.1 percent in the first four months of 2012, according to the research firm.
Assets managed by hedge funds grew to a peak of $2.14 trillion in 2007 from $118.2 billion 10 years earlier, according to data compiled by BarclayHedge Ltd., a Fairfield, Iowa-based research firm. Meanwhile, assets in funds-of-funds tumbled to $643 billion in the first quarter from a peak in 2007 of $798 billion, according to Hedge Fund Research.
Faced with that decline, companies have sought to bolster their asset bases by acquiring competitors and then eliminating jobs and cutting costs.
‘Future is Bleak’
Man Group Plc (EMG), the world’s largest publicly traded hedge- fund company, agreed this month to buy FRM Holdings Ltd. The deal will add $8 billion of assets to Man Group’s $11 billion fund-of-funds business, the London-based company said May 21.
FRM will only receive cash from the sale if the firm retains assets, with as much $47.5 million due to be paid out after one year and as much as $66.5 million to be paid after three years, Man Group said.
“Firms below a certain size realize their future is bleak,” said Tullett Prebon’s Campbell, who previously managed a fund-of-funds. “Buyers are capitalizing on this and purchasing businesses at very cheap multiples.”
Gottex Fund Management Holdings Ltd. (GFMN), based in Lausanne, Switzerland, said this month it would buy Hong Kong-based Penjing Asset Management to add a business with about $434 million invested in hedge funds. Union Bancaire Privee, the Geneva-based wealth manager that reorganized after its clients lost money with Madoff, agreed in February to buy Nexar Capital Group, a Paris firm with $3 billion of assets.
EIM also invested in Madoff, who is serving a 150-year prison term after being convicted of running a Ponzi scheme.
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