Blackstone Group LP, already the largest investor in hedge funds, is signing on a team of three traders for the first such fund that it will manage directly, according to two people with knowledge of the plans.
The team will manage about $500 million of client capital and borrowed money to make bets on and against stocks starting this year, said the people, who asked not to be identified because the impending hirings haven’t been announced. New York-based Blackstone has spoken with about 75 traders to add more strategies for its hedge fund, the people said, without identifying how many the firm plans to hire.
Blackstone, which until now has focused on investing in third-party funds and taking stakes in hedge-fund managers, is seeking to attract talent as startups struggle to win money amid lackluster returns. The firm has considered creating its own teams of traders for about a year and a half, according to one of the people, and has been slow to identify and attract them because it wants top talent and has to negotiate novel terms for the teams, who won’t be employees of Blackstone yet will manage money exclusively for the firm.
“There is a lot of competition for talent,” Don Steinbrugge, managing partner of hedge-funds adviser Agecroft Partners LLC, said in a telephone interview. “Everybody would prefer to have their own fund and launch with a billion dollars, which was the norm before 2008. The reality, though, is that’s more difficult now.”
Tom Hill, a vice chairman at Blackstone, has expanded the firm’s hedge-fund unit to more than $58 billion, from $2 billion in 2000, making it the world’s largest manager of funds of hedge funds. Competitors Carlyle Group LP and KKR & Co. have acquired hedge funds to manage client money directly.
Hill, 66, will oversee the new team and evaluate traders’ bets together with Parag Pande and Gideon Berger, a partner at Blackstone Alternative Asset Management, or BAAM, the people said. Pande joined Blackstone this year from Ziff Brothers Investments LLC, the hedge fund that managed the family fortune derived from William Ziff’s magazine-publishing empire.
“We expect by the end of 2016 to have multiple billions in this new platform,” Hill said on June 12 at Blackstone’s investor day in New York.
Peter Rose, a Blackstone spokesman, declined to comment on the plans. The Wall Street Journal reported yesterday that the traders will start as soon as September.
BAAM plans to limit the teams to investing in equities while Blackstone tests the structure, said the people. The firm believes it can create returns higher than those of the broader market with stock-picking talent, they said.
Blackstone first evolved beyond its strategy of allocating client money to hedge funds by seeding new funds with startup money. This year, BAAM also set its sights on buying stakes in hedge-fund firms. Senator Investment Group LP, which managed $6.7 billion as of February, told clients that month that Blackstone bought a minority piece of its business.
“It’s difficult for funds of funds to raise money, especially as returns have come under pressure, so everyone has to compete for money,” said Steinbrugge. “If you have some proprietary product that others don’t have, that could potentially give you a competitive edge.”
KKR, run by Henry Kravis and George Roberts, bought a stake in hedge-fund manager Nephila Capital Ltd. last year to expand its offerings, and the New York-based firm manages credit hedge funds with about $800 million in assets. Carlyle, based in Washington, owns stakes in hedge-fund firms Claren Road Asset Management LLC, Emerging Sovereign Group LLC and Vermillion Asset Management LLC. Both firms also manage funds of funds.
Blackstone is “taking advantage of the very strong reputation they have in that area,” Carlyle co-Chief Executive Officer David Rubenstein said in a Bloomberg Television interview today. “They built a very wonderful hedge fund-of-funds business. So I wouldn’t be surprised they’re doing it,” he said of the new strategy.
Blackstone’s Hill, a former co-chief executive officer of Lehman Brothers Holdings Inc. with Richard Fuld, joined the firm in 1993. Hill’s previous success and the growth of Blackstone, which went public in 2007, has given him a $1.4 billion net worth, according to the Bloomberg Billionaires Index.
Founded in 1985 by Peter G. Peterson and Stephen Schwarzman as a deal-advisory and private-equity firm, Blackstone has grown to oversee $272 billion in real estate, credit assets, private-equity investments and hedge funds.