Blackstone Readies Big-Bet Hedge Fund
Private-Equity Firm Hopes Fund Will Fund Several Teams of Traders
Blackstone Group LP is quietly laying plans to start a hedge fund that will make big, bold bets, an effort it hopes will eventually rival some of the largest firms in the business, according to people familiar with the plans.
The private-equity firm will fund several teams of traders with hundreds of millions of dollars to place a relatively small number of large, highly concentrated wagers, the people said. The strategy is notable now as many hedge funds are shying away from making such outsize bets.
Combined, the teams' investments will form a multistrategy hedge fund to be pitched to wealthy clients. New York-based Blackstone is confident the firm can hedge the overall risks, according to people familiar with the firm's plans.
Blackstone is aiming to rival powerhouses such as Millennium Management LLC, which has $23 billion under management; Chicago-based Citadel LLC, which has $22 billion; and the $45 billion Och-Ziff Capital Management LLC in New York.
The move fills a gap for the $272 billion-asset manager, which already boasts a lineup of private-equity funds and mutual funds. Blackstone already has the world's biggest collection of so-called funds of funds that invest in other firms' hedge funds and is the biggest investor in hedge funds.
Though it bought leveraged- finance specialist GSO Capital Partners in 2008, and assumed control of its credit-focused funds, it has only twice tried to build an internal fund. Both efforts were scrapped during the financial crisis.
Hedge funds are attractive largely because of their fees. They traditionally charge a 2% annual fee and a 20% cut of the profits, double what even the priciest funds of funds command.
But while the move comes with potentially big rewards, it also comes with big risks.
"This puts them more deeply in the equity long/short business, which they are not particularly famous for," said Bob Olman, managing partner at hedge-fund-recruiting firm Alpha Search Advisory Partners in Manhasset, N.Y.
On average, hedge funds have returned 2% this year through the end of May, according to research firm HFR Inc. They are on track for the sixth consecutive year of underperforming the S&P 500, including dividends, though many funds don't purport to match equity benchmarks.
Almost 10% of hedge funds close every year, according to HFR Inc.
Other big private-equity firms are similarly diversifying beyond corporate buyouts, but some have stumbled in the hedge-fund sector. Blackstone rival KKR & Co. is dismantling one of its in-house hedge funds amid tepid fundraising and subpar performance.
The Blackstone effort is being overseen by the firm's $60 billion Alternative Asset Management arm, led by J. Tomilson Hill.
Blackstone is seeking to hire former traders pushed out by new regulations including the so-called Volcker rule, which bars banks in the U.S. from making bets with their own proprietary capital. The buyout shop also is interviewing traders at existing hedge funds who may want to start on their own.
As part of the novel structure, the traders won't be Blackstone employees but will be grouped in independent management companies.
Blackstone is in final negotiations with the first teams, who will start as soon as this fall. They will each start with as much as $500 million, including borrowed money; in total, the managers are likely to oversee billions of dollars in positions collectively before the end of the year, according to the people with knowledge of the plans.
Hedge funds have reported tepid performance in recent years, which industry executives say partly results from the rise of deep-pocketed pension funds, endowments and other institutional investors that prefer lower returns in exchange for a reduced possibility of significant losses.
In contrast, Blackstone, founded in 1985 by Stephen A. Schwarzman, is looking for stock traders that will scour the globe for four to six big bets a year that may profit on either rising or falling share prices.
In one way, Blackstone's model resembles SAC Capital Advisors LP, the fund led by Steven A. Cohen.
Blackstone's trading teams will pitch their best ideas to a group including new hire Parag Pande, formerly of closed hedge-fund firm Ziff Brothers Investments, risk officer Gideon Berger and Mr. Hill. If it likes the ideas, Blackstone will give the team additional cash to piggyback on the trades or use the ideas in other firm products.
Not dissimilarly, SAC, traders funneled their most promising pitches to Mr. Cohen's multibillion-dollar personal portfolio and received a bonus if they generated major profits for him, people familiar with the firm said.
SAC returned external money earlier this year in the wake of an insider-trading scandal.