Mercantile Bankshares Corp. has taken a small step toward selling alternative investment products through its bank by its purchase of a minority interest in a Virginia private investment firm.
The Baltimore regional banking company said Monday that it had bought a stake in Winston Partners, a McLean, Va., firm that sells hedge funds and private equity funds. Winston has doubled its assets under management in the past two years, to $650 million.
The deal is a step in Mercantiles strategy to expand its footprint by offering alternative investments. Wallace Mathai-Davis, the chairman of Mercantiles investment and wealth management unit, said the company is going to work with Winston to develop a set of proprietary alternative investment products. He said that by July Mercantile will start a small-cap equity fund of funds that takes both long and short positions in stocks. The company also plans to begin offering Winston Partners products.
We are committed to having an open architecture when it comes to alternative investments, Mr. Mathai-Davis said. But this alliance is extremely important. Winston is one of the distinguished fund of fund firms in the United States, and their record reflects that.
Alternative investments are an important part of Mercantiles growth strategy. In February, it hired two hedge fund veterans, Mr. Mathai-Davis and John J. Pileggi, to lead the effort.
Mr. Mathai-Davis said that selling hedge funds to its own customers and through other banks is how Mercantile plans to grow beyond its tristate market area in Maryland, Pennsylvania, and Delaware.
Winstons hedge fund group is a family of multimanager strategies with tailored investment objectives. Its private equity group focuses on small-cap buyouts and growth capital.
Analysts said Mercantile is approaching alternative investments wisely. By offering third-party hedge funds, the company can test its clients interest in the product before unveiling a proprietary group of hedge funds.
Executives at alternative investment firms say that for large banks, fund companies, and insurance firms looking to offer alternative investments the biggest challenge is finding experienced and qualified managers.
The best managers dont want to be part of a big organization, said Gunter Mathis, chief operating officer of Quadriga Asset Management Inc., a New York hedge fund company. Why would a successful hedge fund manager who left a big company to start a hedge fund want to go back? It would be completely schizophrenic.
Mr. Mathis, whose company has $220 million of assets under management, said many banks and large companies are looking to get into alternative investments just as Mercantile has by buying a piece of a successful independent manager. He said he has fielded and rejected offers in recent years from large banks and insurance companies. It will be increasingly difficult to find good hedge fund companies willing to sell to a larger firm, he said.
Mr. Mathai-Davis said finding and developing hedge fund talent is impossible. The strategic alliance will be the new business model of wealth management for firms developing new business, he said. It is not necessary to try to create everything as a proprietary product. In fact, it is a mistake.
