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The hedge fund industry in the United States has traditionally been led by only a select few hedge funds. Challenging this situation is Rothschild, who is seeking to double the size of its fund of hedge funds with a US purchase.
Rothschild would like to join the ranks of the biggest hedge funds in North America so that it can flourish as those other top players in the hedge fund industry flourish.
Rothschild’s first venture into this industry came last year when, for an unknown amount of money, they bought the fund of funds company HDF Finance.
Currently Rothschild has between 5 and 6 billion euros under management in its hedge fund business. This business includes a limited amount invested in New York-based funds of funds.
“If you look at the U.S. fund of hedge fund business it’s fairly concentrated,” Jean-Louis Laurens, the chief executive of Rothschild’s asset management arm.
“You have a couple of very large players and you have a number of smaller players, some of them struggling to remain in the business and falling a little bit below the $5 billion mark that institutions or consultants would be comfortable with,” he added.
Funds of funds in the hedge fund industry are a typical way managers mitigate risk and are an often used strategy for hedge fund risk management, protecting the investments from the sharp swings in value which hedge funds are frequently subjected to.
Funds of hedge funds have traditionally been crucial in the investment world. Hedge fund due diligence on managers was always carried out in an expert manner, while portfolios were custom-made for clients who needed such guidance. Unfortunately changes have crept into the hedge fund industry with recent bad returns and poor reputations due to the scandal of Bernard Madoff.
Rothschild’s acquisition of one of its smaller rivals will allow it to enlarge its offerings to its clients well taking the firm well above the investment threshold of institutions. Laurens said that the purchase would increase Rothschild’s own fund of fund assets to about $10 billion.