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5 Dec 2006

Hedge Funds in Stock

Brookville Capital Management, a 4 year old hedge fund with less than ten employees and about $221 million in assets under management, has been bought by Morgan Stanley.

Morgan Stanley has already acquired a large stock of hedge funds, in late October the giant agreed to buy FrontPoint Partners, a hedge fund with about $5.5 billion, for about $400 million. Last month said it would buy a minority stake in Avenue Capital Group, which oversees about $12 billion of distressed debt investments, and in Landsdowne Partners. John Mack, Morgan Stanley’s chief executive, has assembleed these hedge funds to help the firm catch up with rivals like Goldman Sachs in offering clients alternative investments.

The company said in a memorandum that the expansion is part of Morgan Stanley's aggressive push to catch up with rivals in providing hedge funds and other alternatives to traditional money management products such as mutual funds. The price of the acquisition was not disclosed in the memo.

Brookville is based in New York and was formed in August 2002 by former Bankers Trust New York Corp. traders David Reiss, Jacob Gulkowitz and Abraham Gulkowitz. The hedge fund specializes in what is known as credit arbitrage, taking long and short positions in companies whose stock prices are driven by takeover speculation and other "event-driven" opportunities, the memo said.

The memo was signed by Owen Thomas, president of Morgan Stanley's asset management division, along with alternatives investment chief Stu Bohart and the group's strategic acquisitions and absolute return strategies head, Yie-Hsin Hung.

Hedge Fund Clones

Goldman Sachs has set up a hedge fund replication tool in a move that could lead to a shake-up of the $1,300bn hedge fund industry.

With a minimum investment of £10.00 ($19.87)and £10.00 Issue Price, Goldman’s Absolute Return Tracker index will undercut the high fees of the hedge fund sector with a 1% flat fee. Hedge funds and funds of funds can charge 47%. At maturity, the investor receives a one-for-one exposure to the performance of theiiindex return.

According to the Financial Times the tracker is set to be among the first of a flood of hedge fund cloning products likely to be launched in a revolution being compared with the arrival of index trackers in the mutual fund world a generation ago. “There is a lot of dead wood in the industry – people who should not be running hedge funds,” said Harry Kat, professor of risk management at London’s Cass Business School, who has just launched his own hedge fund replication tool.

Replication strategies are based on academic research that suggests hedge fund performance is largely driven by movements in underlying markets, such as equity, bond and commodity prices, rather than the intrinsic skill of managers.

Goldman has spent two years developing the algorithm that underpins its platform. The performance characteristics of thousands of hedge funds will be fed into the system monthly and Art is designed to decompose these data and calculate the aggregate position of the hedge fund universe. This position can then be replicated, potentially allowing Goldman to generate hedge fund performance at a fraction of the cost.

It will be far more liquid, with trading available on a daily basis. “This may be ideal for any large institution that has been looking at hedge funds but doesn’t like the fact that it takes six months to put money [in] and to take it out again,” said Edgar Senior, executive director in Goldman’s fund derivatives structuring team.