Blackstone Towers over Feeder Funds

Chidem Kurdas

Fund of hedge funds are still reeling from the Madoff fraud and huge redemptions. They had another net outflow of assets in 2010, despite investors moving back to hedge funds. But you would not know that this sector is in dire straits from Blackstone, which ended the year with a net inflow of $4.3 billion into its fund of funds and started a second manager seeding vehicle to feed the investment program.

Do other fund of funds have a chance? Certainly some are trying, even as the Blackstone behemoth attracts institutional investors. 

Raymond Nolte’s SkyBridge Capital, one of the larger fund of funds firms, is marketing to the mass affluent—accredited investors who may have a couple of million dollars in liquid wealth and want to put a piece of that into hedge funds. SkyBridge oversees some $7.4 billion after acquiring Citigroup’s fund of funds last year.

Blackstone’s funds of funds have a record $34 billion—out of total Blackstone assets of  $128 billion, including separate credit, real estate and private equity funds. That’s a lot of purchasing power and means that Blackstone will get the best managers and the best deals with managers, says an investor. That is part of the reason so many institutions want Blackstone to invest for them.

All this makes Blackstone a class into itself, different from other funds of funds. Blackstone senior managing director Joan Solotar observed last week that one should not extrapolate from Blackstone’s capital raising to the rest of the industry. Indeed, even relatively close competitors are in another predicament as they seek ways to grow in a shrinking industry.

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