BlackRock to buy Quellos fund of funds business

BOSTON (Reuters) - Asset manager BlackRock (BLK.N) on Tuesday said it will pay $1.7 billion to buy the fund of funds business from Quellos Group LLC at a time when more clients want to invest in loosely regulated hedge-fund portfolios.

New York-based BlackRock, which manages $1.2 trillion, said it will pay $562 million in cash and $188 million in stock. Quellos may also receive an additional $970 million in cash and stock over 3 1/2 years.

Quellos' fund of funds business ranks as one of the largest in the world and will help BlackRock, the largest publicly traded U.S. asset manager, expand quickly in areas that are becoming very popular with investors.

"More and more, clients are looking beyond just equity and bonds," BlackRock Chairman and CEO Laurence Fink said after announcing the investment.

So-called hedge funds of funds create portfolios of individual hedge funds that seek to minimize the risk and maximize the gain, making them very popular with pension funds.

The combined business will be called BlackRock Alternative Advisors, be headed by Quellos Chief Investment Officer Bryan White and manage more than $25.4 billion in assets.

BlackRock's share price gained 1.34 percent, or $2.07, to $156.60 on the news, having jumped 17.02 percent in the last 52 weeks.

The move comes at a time when several of BlackRock's rivals, including Legg Mason, Morgan Stanley and JP Morgan Chase, have already bought stakes in hedge-fund groups.

Assets in hedge funds have more than doubled to $1.5 trillion in the last three years as investors rely on the loosely regulated portfolios to make money in all markets by using techniques such as shorting and leverage that are off limits at most mutual funds.

The deal also follows on the heels of last year's investment where BlackRock gained control of Merrill Lynch's asset management unit. Merrill owns 49 percent of BlackRock's shares.

But Tuesday's news also raised some eyebrows as it came on the day The Wall Street Journal ran a story quoting the company's chief investment officer for global equities, Robert Doll, as saying his team would wait on hedge funds.

Overall, the deal underscores the style of Fink, BlackRock's founder and CEO who broke off from the Blackstone Group in 1994, the same year Quellos was founded.

Praised for his negotiation skills and ability to woo and keep high-profile staffers, Fink is known to stick to a routine that signals continuity that has long served the firm well.

Only recently Fink told analysts that BlackRock customers, who might have previously worried about how the Merrill Lynch deal would affect morale and business, were no longer concerned, saying BlackRock was out of the penalty box.

Fink also sought to calm nervousness about a probe into questionable tax shelters at Quellos, by saying that the firm will not buy the businesses involved in civil lawsuits and will not take any related potential liabilities.