Bank of New York Co. this week joined a growing list of banking companies positioning themselves to offer hedge fund investments to wealthy clients - and is one of the first to do so through a purchase rather than a partnership.
The company said Tuesday that it had a deal to buy Ivy Asset Management of Garden City, N.Y., a firm that specializes in "funds of funds," which are attractive to wealthy clients who want to diversify their investments. KeyCorp, Chase Manhattan Corp., Citigroup Inc., and National City Corp. are banking companies that have introduced or created access to similar hedge funds.
Mark Hemenetz, executive vice president and director of investment management at the Bank of New York, said stiff competition exists to serve high-net-worth investors, who make up the fastest-growing segment of the investment marketplace.
The deal gives Bank of New York the ability to offer Ivy's funds both to wealthy people and institutional investors. The firm typically requires a minimum investment of $500,000 to $1 million for individuals and nearly $50 million for institutions, with thresholds varying among its 13 funds, said Howard Wohl, Ivy's chairman and chief executive officer.
Ivy was approached by a number of suitors, but the firm liked the autonomy and wide distribution offered by Bank of New York, said Mr. Wohl. The buyout also solves the problem of succession, he said, when he and co-founder Lawrence Simon retire.
Hedge funds are becoming more attractive to banks because of the increasing interest shown in them by wealthy clients and institutions such as insurance companies and pension funds, said Mr. Hemenetz.
"The battle is for a larger piece of the investor's wallet," Mr. Wohl said.
Wealthy people and families are lured by alternative investments and the chance to entrust their assets to world-class money managers, said Virginia Reynolds Parker, president of Parker Global Strategies in Stamford, Conn. Institutions are also increasingly attracted to these funds because many want access to investment strategies - such as shorting stock, or borrowing to invest - that are not available in traditional mutual funds, said Ms. Parker.
The funds are designed to offer low volatility, and positive returns even in a down market, said Mr. Hemenetz. Their yields typically exceed those of Treasury bills by 500 basis points, he added.
Several Japanese insurance companies have made substantial investments in U.S.-managed offshore hedge funds in recent years, Ms. Parker said. Some have invested $1 billion and more in such funds, which suggests that these portfolios will become an increasingly important vehicle for large institutions, she added.
Nonetheless, hedge funds are unlikely ever to account for more than 10% of a bank's private-client division, said Ms. Parker, since investors are unlikely to put a larger percentage of their portfolios into such products.
Assets in hedge funds worldwide are expected to grow to $500 billion by yearend if current trends persist, she said. Estimates of the number of hedge fund managers run from 3,000 to 4,000, said Mr. Wohl.
The advantage of buying a firm rather than building a division is that the banking company gets experienced people, who should help reduce the risk that often comes with alternative investment strategies, said Ms. Parker. "The more experience the team has," she said, "the better off they're going to be."