Blackstone set to launch new hedge fund - sources

By Dane Hamilton
518 words
8 July 2005
11:40
Reuters News
English
(c) 2005 Reuters Limited

NEW YORK, July 8 (Reuters) - The Blackstone Group is set to launch a $500 million hedge fund, marking the latest move into a growing asset class by a major private equity firm, people familiar with the matter said this week.

Blackstone held a private launch party at New York's Waldorf-Astoria hotel last week for the new fund, which will focus on buying distressed debt, sources said. The fund's announcement is expected shortly.

The formation of Blackstone's first proprietary hedge fund comes amid a further blurring of the lines among buyout and hedge funds. Recently, large buyout funds such as Carlyle Group, Texas Pacific Group and others have raised hedge funds, while large hedge funds like D.E. Shaw & Co., Amaranth Advisors and others expand buyout activities, industry sources said.

Blackstone declined to comment. Private equity and hedge funds face regulatory restrictions on publicly discussing fundraisings until they are completed.

The Blackstone move comes amid continued asset growth in hedge funds, which typically practice short-term trading strategies aimed at generating mid-teens returns. Hedge fund assets, which now exceed $1.1 trillion, are expected to top $1.3 trillion in 2006, according to a recent Merrill Lynch report.

PRIME BROKERS

Hedge fund asset growth is prompting a rush by leading investment banks to service the industry through prime brokerage services such as trading execution and clearing, capital introduction and other services.

Goldman Sachs , Morgan Stanley and Bear Stearns currently dominate the prime brokerage business, but other banks including UBS AG and Citigroup are making inroads into the profitable area.

Blackstone has signed up Citigroup and Bear Stearns for its hedge fund prime brokerage business, sources told Reuters.

Blackstone's new hedge fund is modest compared to its latest $6.45 billion buyout fund and a next generation $11 billion-plus buyout fund it is raising. But the firm is expected to further diversify its hedge fund activities in coming years beyond distressed debt, which involves trading corporate bank and bond debt trading well below par value.

Blackstone is not new to hedge funds, having for years operated a $9.3 billion fund-of-hedge-fund that invests in other hedge funds.

Private equity firms are in a pole position to identify hedge fund trading opportunities, since they typically spend months or years exploring investment opportunities. If they lose out in buying a target, they can use the knowledge gained to trade debt or other securities in the target or related companies, experts say.

The privately held New York asset manager and investment bank, which has raised some $32 billion since inception in 1985, formed its Distressed Debt group late last year, headed by John Dionne, managing director and chief investment officer.

It announced in March it hired two other specialists to lead the effort, including Il Lee, a former vice president of $3 billion hedge fund Harbert Management Corp, and Jeremiah Keefe, former director of European distressed debt for Deutsche Bank.

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