More Consolidation of Fund of Hedge Funds and What it Means

More Fund of Funds Consolidation and What it MeansLast week The Carlyle Group announced the acquisition of Diversified Global Asset Management Corporation (DGAM), a global fund of hedge funds manager with more than $6.7 billion assets. Carlyle, an alternative investments shop with $185 billion in assets, has historically been know as a private equity and private real estate firm. So why are they now getting into the fund of funds business, and how does this potentially impact the liquid alternatives market?

There are a couple reasons why Carlyle has made this move. In their press release, Carlyle’s David M. Rubenstein, Co-Founder and Co-Chief Executive Officer of Carlyle, stated, “We are focused on providing fund investors with a broad suite of investment options under one roof. With the DGAM partnership, Carlyle’s Solutions platform is now positioned to offer investors the ability to allocate across alternatives in hedge funds, private equity and real estate.” Strategically, this makes a lot of sense. Being a one stop shop for alternatives helps significantly on the fundraising side of the business. Large institutional investors don’t want more vendors to deal with, so being able to offer these investors a full range of alternatives makes their lives easier. The fund of funds acquisition, along with other acquisitions that Carlyle has made recently, including a private equity fund of funds firm, helps complete their portfolio of alternative product offerings.

What is not said in the press release however is that the DGAM platform also provides the manager research skill set and manager access for launching liquid alternative products into the retail market. Some of Carlyle’s largest competitors, such as Blackstone and KKR, have already launched alternative, hedge fund style mutual funds, and no doubt will be launching more. Due to the slower growth experienced by fund of hedge fund firms, and declining asset levels for some, valuations for these firms are reasonable. That makes this market even more ripe for further consolidation.

Just last year Franklin Resources purchased K2 Advisors, one of the largest fund of hedge funds in the world. This year, they launched the Franklin K2 Alternative Strategies Fund, a multi-manager mutual fund structured by K2. Other firms, such as Arden, Collins Capital, and Morgan Stanley‘s Alternative Investment Partners’ unit have launched new multi-manager mutual funds this year. All of these products are filled with traditional hedge fund managers that have been willing to allocate some of their limited capacity to the retail channel.

Will we see a retail product from Carlyle? Up to this point, the firm has not been focused on this channel. But neither was Arden, Blackstone, Collins, K2 or KKR. The acquisition of DGAM gives Carlyle the key components required to build a product – manager research, due diligence, portfolio construction and, most importantly, access to high quality hedge fund managers. Retail distribution is the only component that they don’t have, and given their resources, this can be built quickly. Don’t be surprised to see new liquid alternative offerings from Carlyle in the near future.

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