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Wednesday, March 26, 2014

Blackstone to Birth Fund Clone This Summer

Reported by Anastasia Donde

Blackstone Alternative Asset Management, which launched its first multi-manager mutual fund in August, is planning to set up another clone fund this summer. The first fund was seeded with $1 billion from Fidelity Investments and will continue to grow through Fidelity's relationships as part of its discretionary managed account platform, but the second fund will be open to other investors, said John McCormick, senior managing director and head of global business strategy at Blackstone.

Blackstone already selected 15 managers for the existing fund and will add more as the funds grow. The Blackstone Alternative Multi-Manager I fund is now at $1.2 billion, with the $200 million coming from performance.

"This would be a dynamic product just like everything else we do," McCormick said.

Blackstone already runs its broadly diversified institutional Blackstone Partners fund and would like the retail version to mirror it to the extent possible.

"We'd like the mutual fund to work in the same way," McCormick said, although he conceded that getting all the strategies in the Partners fund into a liquid form would be difficult. "Particularly in less liquid credit, it will be hard to put that on the platform," he said, but added that the firm has already found ways to get mortgage, insurance, and mid- and small-cap exposure into the mutual fund version. "Our objective is to keep widening the space," McCormick added.

He said that Blackstone doesn't have specific growth targets for the mutual funds, but that there is a lot of room for growth in this area, as they are becoming attractive to family offices, insurance companies and 401k plans that are looking for better, more uncorrelated sources of return. Within Fidelity, the fund is housed in the firm's Strategic Advisers business, a $124 billion managed account platform that oversees 401k and IRA accounts for clients on a discretionary basis. It's not yet clear whether Blackstone would do another partnership for the second fund or go it alone.

Industry experts say it will be difficult to convince prominent hedge fund managers to run daily liquid versions of their strategies and deal with all the other '40 Act requirements and restrictions. Blackstone executives admitted that this is indeed true. But they said they have been having these conversations with their hedge fund managers for three to four years and it took a long road to get there. The firm's size and scale give it clout with hedge funds. At $54 billion, Blackstone is the largest hedge fund investor in the world. Blackstone has also been a big player in hedge fund seeding for a long time and helped many leading hedge fund managers get their start, which also helps these negotiations along.

"We're not going out there and twisting people's arms to do this," McCormick said. "We can go out and say, 'we are your biggest client and we can tell you this is where the money is going, let us help you enter the market with scale and with a partner you can trust," he added.

In order to be a part of the fund, the sub-advisory managers need to have the right compliance procedures in place. redefine some of their custodial relationships and re-jigger a lot of their activities to be palatable to the retail crowd.

"You need to have a lot of negotiations with managers, you need to put a board together. It's a lot of brain damage for the senior people at the firm," McCormick said. But having gone through that process, these firms can now go out on their own to market themselves to the retail world.

"It's a call option on a future business and they can leverage this track record with us," said Brett Condron, managing director in Blackstone's Hedge Fund Solutions group. "But they need to make an investment on building daily infrastructure and to get up to speed on '40 Act fund management" he said. "That's going to complicate their business, but I think they need to make a strategic decision to be here."

Blackstone has been fishing among its existing pool of underlying hedge fund managers for strategies that can be offered in a more liquid format. So far it has several prominent hedge funds, including Wellington Management, HealthCor Management, Two Sigma Advisers and Cerberus Capital Management, sub-advising the mutual fund.  

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