Boston Deal Firm Nears Pact to Buy Stake in Hedge Fund Titan

Brokerdealer.com blog news extract courtesy of the Wall Street Journal.

A Boston investment firm is nearing a deal to buy a stake in hedge-fund giant D.E. Shaw Group for more than $500 million from the estate of Lehman Brothers Holdings Inc., according to a person familiar with the matter.

Affiliated Managers Group Inc. AMG +0.25% has bid for the 20% stake in a deal that would value D.E. Shaw at more than $2 billion. An agreement in principle has been reached but a final deal isn’t imminent and could still fall apart, according to people familiar with the matter.

D.E. Shaw, based in New York, manages about $32 billion and is known for its quantitative-trading strategies. Lehman Brothers, the investment bank that collapsed in 2008, paid between $750 million and $800 million for the stake in 2007, part of a wave of activity before the financial crisis by banks looking to buy their way into the hedge-fund business.

Investment groups have raised billions of dollars recently to buy minority stakes in hedge funds, prompting some in the industry to question whether the market is frothy.

The deals are a way for stakeholders to profit from hedge-funds’ management fees and performance, and buyers see more opportunity as banks have pulled back to adapt to stricter capital rules on managing capital and risk.

Hedge-fund clients don’t always like the deals, worried they are a way for managers to cash out. But managers and stake buyers say the sales are often structured to ensure that managers remain active, can help motivate employees if they creates a more attractive incentive structure and can increase the long-term odds a firm will endure beyond its founder’s involvement.

For the full story, please visit the Wall St. Journal article.