Managing hedge fund investments isn't the lucrative business it used to be, and Toronto's Diversified Global Asset Management Corp. is suffering from the downfall. Private equity giant Carlyle Group, which owns the money manager, has shut it down.
For DGAM, the decision marks a reversal of fortunes. Carlyle bought the firm for roughly $30-million (U.S.) in 2013, offering to pay up to $70-million more should it meet certain return thresholds. On Friday, the private equity buyer scrapped the investment, closing DGAM altogether.
When DGAM was founded in 2004, hedge funds were mostly in their infancy. Few of the major investors that wanted exposure to this world had the necessary expertise to make money. To help, DGAM would advise on which hedge funds to invest in, making sure the collection of funds had different assets and weren't too closely correlated to one another.
Over the years, these major investors have become much more sophisticated, building their own in-house teams to manage hedge fund exposures. That's changed the fee structure for many fund-of-fund managers, as they are known – they used to be paid a percentage of assets under management; today, they mostly make advisory fees that can be as low as 20 per cent of what they once earned.
Because the margins are much slimmer, it takes scale to be successful. Those who do it well often advise on $50-billion or more in assets. DGAM had $6.7-billion in assets when Carlyle bought the firm in late 2013.
Hedge funds, broadly speaking, have also fallen out of favour. Before the financial crisis, many of them delivered outsized returns, so major investors such as pension funds and sovereign wealth funds wanted exposure to them. Lately, their returns haven't been nearly as stellar, and that has made some big institutions question their exposures. Pension giant California Public Employees' Retirement System (Calpers) said it would exit hedge funds altogether.
Carlyle first acquired DGAM when it was on a mission to diversify its earnings away from traditional buyouts. Lately, management has seemed unhappy with the results. In December, Carlyle said Jacques Chappuis, the former fund-of-funds head, had left the firm and would become an outside adviser.
DGAM chief executive officer George Main did not reply to a request for comment.