December 16, 2011, FundFire
Cantor Fitzgerald has acquired Cadogan Management, a New York-based private investment management firm, and Cantor’s advisory unit will now manage the latter’s hedge fund of funds program.
The acquisition is the first step in Cantor Fitzgerald Investment Advisors’ strategy to build an in-house alternatives platform that will include hedge funds of funds, private equity funds of funds, single strategy hedge funds and advisory services. As part of the acquisition, Cantor is bringing onboard 12 professionals from Cadogan, mostly junior and senior members from its research team.
Cantor looked at about 20 different firms during the past six months before striking the deal with Cadogan, according to Stephen Ardizzoni, co-head of Cantor’s advisory group. Ardizzoni says Cantor plans to acquire one or two more hedge fund of funds managers before turning its attention to private equity fund of funds and single strategy hedge funds.
Ardizzoni says Cantor is especially interested in emerging hedge fund managers, which he predicts will be a burgeoning sector over the next few years due to a proliferation of layoffs and other factors.
“Someone with 10 years of experience can launch their own hedge fund,” Ardizzoni says. “The supply of talent will be good.”
He adds that the demand for alternatives will also likely rise, especially in the pension space. Cantor is aiming to build its alternatives platform over the next two to five years, according to Ardizzoni.
“As the volatility from the equity market continues, pensions are going to be forced to be realistic and look at investing more into alternatives,” he says.
John Trammell, who was the CEO of Cadogan and is now the other co-head of Cantor’s advisory group, says his firm had been looking for a buyout partner and, like Cantor, had spoken to about 20 potential buyers. Although he says Cadogan’s performance had not dipped, he notes that beta-neutral wwwucts had fallen out of favor with investors in 2009 and 2010 and that the fund’s assets under management had fallen off.
That decrease caused some of the firm’s big institutional investors to worry about “perceived business and operational risks,” according to Trammell. So Cadogan wanted a strategic partner to work with to strengthen its balance sheet.
“Whether it’s real or perceived, institutional investors have a fear that no matter how liquid and safe it is, they will be the last person in the fund and will be left holding the bag when the fund winds down,” Trammell says.
One reason Cadogan decided to partner with Cantor, Trammell adds, is because the latter did not have hedge funds of fund as a part of its business. This will allow Trammell and his team to help build out this business for Cantor.
Ardizzoni declines to disclose Cadogan’s assets under management, but Trammell notes that it had $1.6 billion heading into this year. He says that some of his clients are still deciding whether they want to make the move over to Cantor.
Donald Steinbrugge, managing partner at consultancy and third-party hedge fund marketing firm Agecroft Partners, says that there is plenty of tailwind for alternatives managers in the pension space. As pensions struggle to generate returns, he expects that they will be increasing their allocation to alternatives over the next five years.
In fact, Steinbrugge says that he expects the largest and most sophisticated pensions to increase their allocations to alternatives by about 30%, whereas many are currently at around 20%. Although private equity is currently the alternative of choice for many pensions, Steinbrugge says that hedge funds will eventually become the bigger allocation.
“Pension funds are looking at how endowment funds are invested, and their asset allocation revolves around the endowment fund model, which has more in hedge funds than in private equity because they are more liquid,” he says.
“I think there is going to be a significant amount of money coming from the pension space into alternatives, and more and more firms are going to try and capture that money,” Steinbrugge adds.