Lehman Is Said to Agree to Buy 20% of Ospraie Management - 04/19/05

Lehman Brothers has agreed to buy 20 percent of Ospraie Management, a hedge fund that manages about $2 billion and invests primarily in basic industries and commodities, people briefed on the negotiations said yesterday.

The deal, while small, highlights two trends on Wall Street.

Investment banks are searching for ways to guarantee access to hedge funds - privately held investment vehicles for institutions and the rich - to meet the soaring demand from both institutional clients and wealthy investors.

At the same time, large, established hedge funds are searching for stable investors, like Lehman, to help them expand their business in a controlled manner.

Representatives for Lehman Brothers and Ospraie Management declined to comment.

While many banks are talking about such investments, few have actually completed one. Last September, J. P. Morgan Chase bought a majority stake in Highbridge Capital Management.

Lehman Brothers was recently exploring an acquisition of all or some portion of GLG Partners, a British hedge fund in which it currently owns a 20 percent stake. That deal was said to have fallen apart because of regulatory scrutiny of GLG Partners.

Hedge funds are one of the fastest-growing areas of finance. Fifteen years ago, hedge funds managed less than $40 billion; today, the figure is approaching $1 trillion.

Unlike the 1970's and 1980's, when hedge fund investors were predominantly wealthy individuals and families, institutions like endowments and pension funds are playing an increasingly significant role in that growth.

Unlike mutual funds, which are highly regulated and restricted in their investment opportunities, hedge funds are lightly regulated and can take on more risk and seek more opportunities, investing in derivatives and futures among other instruments.

They can also bet that a stock price will fall, rather than just buying a stock that is expected to increase.

The appeal is that hedge funds can bring outsized returns for which managers are richly awarded in fees.

Recently, however, returns of many hedge funds have been mixed, and industry experts predict that over time they will inevitably come down.

Lehman will get 20 percent of Ospraie's profits as well as access to new investment opportunities started by the hedge fund, which is very important, as the fund has been essentially closed to new investors since its inception.

People briefed on the deal said Ospraie was not expected to increase its capacity in its current fund, but rather Ospraie is expected to allow Lehman and its clients access to new investment opportunities.

For example, if Ospraie started a special situations fund that also invested in basic industries and commodities, Lehman would most likely be guaranteed better access than it might previously have had, one person who had been briefed on the negotiations said.

Dwight Anderson, Ospraie's founder and lead portfolio manager, is a veteran of Julian Robertson's Tiger Management. He joined with Tudor Investment Corporation to form Ospraie in the late 1990's, separating from Tudor in 2003.

The Lehman deal is expected to allow Ospraie better access to a variety of Lehman's businesses, including the prime brokerage business, which lends money to hedge funds to allow them to double or triple their bets.

The deal could also give Ospraie better access to Lehman's huge bond trading business and its equities platform.

If Ospraie chooses to build a new fund, Lehman would have an army of potential investors in its wealthy money management clients and institutions