PARIS Rothschild is looking to double the size of its fund of hedge funds business via a U.S. acquisition to give it the scale it needs to flourish in an industry now dominated by a handful of big players.
Rothschild made its first push into the business last year when it bought fund of funds company HDF Finance for an undisclosed amount.
It now has 5 to 6 billion euros ($6.54-7.85 billion) under management in its hedge fund business, including a small presence 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, said in an interview on Monday.
"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."
Funds of hedge funds help mitigate the risks of investing in an industry prey to sharp swings in valuations.
Once critical in the investment world for their expertise in carrying out due diligence on managers and constructing portfolios for less sophisticated clients, their popularity has waned in recent years because of poor returns and the failure of some to protect clients from the Bernard Madoff fraud scandal.
Top U.S. fund of fund providers include Blackstone, HSBC, Goldman Sachs and UBS.
By acquiring one of their smaller rivals, Rothschild would both lift that firm well above the investment threshold of institutions and allow it to broaden its offering to clients.
It would also boost Rothschild's own fund of funds assets under management to around $10 billion, said Laurens.
Other European asset managers have been looking to increase their U.S. presence, with British fund manager Aberdeen Asset Management, recently buying New York-based asset management firm Artio Global Investors and a stake in private equity business SVG Advisers.
"Being more present in the U.S. market and also having access to the U.S. institutional client base makes sense for us," Laurens said.
Rothschild & Cie Gestion, which has about 22 billion euros ($28.8 billion) under management in total, has hired New York-based Cambridge International Partners, a boutique bank which specializes in the investment management industry, to help find a suitable target.
It has also mandated Cambridge to look for acquisition targets among equity portfolio managers in the United States, potentially doubling its presence in a country where it already has $4 billion under management in large and small cap stock funds, said Laurens.
He is spearheading a wider effort to boost Rothschild's hedge fund business, which has suffered from risk aversion and scepticism about such alternatives investments, especially in its home French market, after the financial crisis and the Madoff scandal.
New products include some using risk management technology developed by France's Edhec business school aimed at limiting downside risk while still providing positive returns.
"It's good for everybody but it's geared essentially to respond to the Solvency II regulatory restraints" faced by insurers, who are limited in their ability to invest in hedge funds by proposed risk-capital rules due to take effect in the coming years, Laurens said.
The Paris-based bank is also planning to start putting its own Rothschild label on select externally managed hedge funds.
"It's about putting a stamp of 'selected by Rothschild,'" he said, something that could ease investor unease over alternative investments.
(Additional reporting by Chris Vellacott and Svea Herbst; Editing by Tom Pfeiffer)