By Rob Copeland
British insurer Aviva PLC will shutter a U.S.-based hedge-fund
arm by the end of the year after a major client asked for its money
back, according to people familiar with the matter.
The Aviva unit, a so-called fund of hedge funds that invests
money across a range of external managers, had roughly $2 billion
under management and boasted relationships with some of the most
high-profile firms in the industry including the activist investors
William Ackman and Keith Meister, the people said.
"Following a comprehensive review of our business, we have
decided to exit the business of investing in third-party hedge
funds," an Aviva spokesman said in a statement in response to
questions from The Wall Street Journal. "We are working with our
affiliates and the underlying hedge fund managers on an orderly
transition plan."
The move comes at a delicate time for Aviva, a three-century old
company that provides general insurance, life insurance and
pensions from its London headquarters. It is trying to convince
investors to support its pending multibillion-dollar takeover of
Friends Life Group Ltd. to create the largest insurance, savings
and asset-management company in the U.K.
Aviva has said the combined group would be "better positioned to
take advantage of the evolving U.K. life insurance market with
greater capacity to invest and innovate." The firm's London-listed
shares traded down 6% this week after the acquisition was
announced.
The closing of the funds-of-funds unit, based in New York, isn't
believed to be related to the takeover. Fewer than a dozen people
are expected to lose their jobs, the people familiar said.
Funds-of-funds pool money from clients and invest in hedge
funds, adding their own sometimes-hefty fees in the process. While
hedge funds have traditionally collected a 2% annual management fee
and 20% cut of all profits earned--the proverbial two-and-20--using
a fund-of-funds can inflate the cost by as much as 50%.
The Aviva fund carries a 0.8% management fee and reserves the
right to take an undisclosed cut of performance gains, according to
a filing.
The industry has been under intense pressure since the financial
crisis, when a combination of market losses and investor panic
stemming from money manager Bernard Madoff's Ponzi scheme convinced
many wealthy individuals and institutions they were better off
selecting hedge-fund managers on their own.
In total, funds of funds world-wide oversee $762 billion, down
from $1.16 trillion at their peak in 2008, according to data and
research firm HedgeFund Intelligence.
To adapt, some of Aviva's competitors have sold themselves to
bigger players like the Man Group PLC, the world's largest publicly
traded hedge-fund firm. Others reinvented themselves as specialists
in discovering talent in small hedge-fund managers, or as experts
in particular strategies.
"It's increasingly difficult to sustain a competitive advantage
unless you can differentiate yourself," said Tom Mahoney, senior
managing director at Tangent Capital Partners LLC, a New York
investment bank specializing in alternative investments. "A
fund-of-funds that is comprised of the largest managers in the
hedge-fund space is a challenging proposition."
Aviva occupied a middle ground. Its underlying managers have
included highflying activist firms Corvex Management LP, run by Mr.
Meister, and Pershing Square Capital Management LP, run by Mr.
Ackman, the people familiar said. The firm also invested with
Discovery Capital Management LLC, which bets on global economic
trends but has been struggling this year, the people familiar
said.
Those hedge funds will likely have to pay back Aviva's money by
the end of the year, which could require them to sell off assets if
they don't have the cash on hand or sufficient fundraising coming
in to offset the redemption.
Write to Rob Copeland at rob.copeland@wsj.com
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