Reluctant hedge fund managers eye M&A deals

By Laurence Fletcher

LONDON (Reuters) - The beleaguered hedge fund industry is rife with talk of consolidation, as dwindling asset bases eat into firms' profits, with the key barriers likely to be hedge fund managers' egos and poor rewards for sellers.

Man Group (EMG.L) and RAB Capital (RAB.L) have both indicated they are in the market for smaller hedge funds, while Cheyne Capital and GLG (GLG.N) have separately announced deals in recent months.

"Everyone is talking to everyone else, saying 'why don't you come in with us, we can have twice the assets under management and half the (combined) staff?'" Stuart McLaren, financial services partner at Deloitte, told Reuters.

For larger firms the downturn is providing an opportunity to snap up bargains, while managers that have seen assets shrink dramatically and find the hedge funds are no longer the lucrative business they once were may sell to a larger partner and keep running money or exit the industry completely.

"There appears to be fair number of investors out there with money looking to buy small and medium-sized hedge fund groups," said Odi Lahav, vice president at rating agency Moody's alternative investment group.

"Although many managers ... several months ago may have been very reluctant to sell their business, these are generally pragmatic individuals and if they're in a sinking ship or in a business which is just now too small to sustain itself, they will likely sell."

Investor outflows of more than $250 billion (152 billion pounds) between October and March, data from Hedge Fund Research showed, have hit the asset bases of most funds, while fees have also come under pressure, meaning that combining or selling up may now be the best business option for many manager.

Mergers and acquisitions in the sector -- rare even during the boom years -- have picked up in recent months and more are expected.