Morgan Stanley May Buy Stake in Hedge Fund Traxis, Person Says

Date: Saturday, September 22, 2007
Author: Jenny Strasburg and Christine Harper, Bloomberg

Sept. 21 (Bloomberg) -- Morgan Stanley is considering buying a minority stake in Traxis Partners LLC, the hedge-fund firm founded by Barton Biggs and other former executives at the securities firm, according to a person with knowledge of the discussions.

Morgan Stanley may acquire less than 20 percent of Traxis, which manages more than $1.5 billion, said the person, who declined to be named because the talks haven't been made public. Morgan Stanley spokesman Mark Lake declined to comment. Biggs and other Traxis executives didn't respond to calls and e-mails seeking comment. Both firms are based in New York.

The world's second-biggest securities firm has pushed into hedge funds in the past year by purchasing stakes in Avenue Capital Group and Landsdowne Partners LP and acquiring FrontPoint Partners LLC. The securities firm had $101 billion of so-called alternative assets under management at the end of August, including hedge funds. Traxis was started by Biggs in 2003 after he spent 30 years at Morgan Stanley.

``They're leveraging where some of their success has been,'' said Douglas Ciocca, who helps manage $1.4 billion, including Morgan Stanley shares, for Renaissance Financial Corp. in Leawood, Kansas. ``Adding to their asset-management capabilities is going to be in their best interest.''

Reuters reported the discussions earlier today.

Biggs, 74, was Morgan Stanley's chief global strategist when he left the firm, having first joined as a managing director and general partner. He was Morgan Stanley's first research director and started its asset-management unit. Traxis co-founders including Cyril Moulle-Berteaux and Madhav Dhar also worked at the division.

Macro Fund

The hedge-fund firm uses a so-called macroeconomic strategy, aiming to profit from swings in stock, bond, currency and commodity prices. Traxis fell 2.5 percent in August, trimming this year's gain to about 8 percent. Hedge funds on average declined 1.3 percent last month, reducing the average advance to 6.2 percent in 2007, according to Chicago-based Hedge Fund Research Inc.

Morgan Stanley's asset-management unit, which includes hedge funds, oversaw $577 billion as of Aug. 31, a 25 percent increase from a year earlier. The division contributed $1.4 billion in revenue and $491 million in pre-tax income in the third quarter.

The firm reported third-quarter earnings Sept. 19 that fell short of analysts' estimates because of losses on loans for leveraged buyouts and a decline in fixed-income trading revenue. Profit from continuing operations dropped 7 percent to $1.47 billion.

`Aggressive Plans'

``We are continuing to invest in specific areas of our asset-management franchise,'' according to a Sept. 19 memo to employees from Owen Thomas and Joanne Pace, the president and operations chief of the asset-management division. They said the unit has ``aggressive business plans'' in place for the fourth quarter and 2008.

``Buying back Barton makes a lot of sense,'' said David Nelson, chief executive officer of Greenwich, Connecticut-based hedge-fund manager DC Nelson Asset Management LLC and a former vice president in investment sales at Morgan Stanley. ``To improve on your trading and asset management, you can either develop it or you can buy it. Here they're talking to a guy they know and respect.''

Besides Morgan Stanley, other banks that have bought hedge- fund stakes include Lehman Brothers Holdings Inc., which acquired 20 percent of D.E. Shaw & Co. in March. The firms are based in New York.

JPMorgan, Goldman

In 2004, JPMorgan Chase & Co. bought a controlling stake in Highbridge Capital Management LLC. Since the New York-based firms joined forces, JPMorgan has climbed to the top of the list of the largest U.S. hedge-fund managers, controlling more than $56 billion in assets this year, according to HedgeFund Intelligence's Absolute Return magazine.

Goldman Sachs Group Inc., Morgan Stanley's larger rival, has said alternative investments under management rose 9 percent to $151 billion at the end of August from a year earlier.

Hedge funds are largely unregulated investment pools that can bet on falling as well as rising asset prices. Their managers gain substantially from profits on money invested.

To contact the reporters on this story: Jenny Strasburg in New York at jstrasburg@bloomberg.net ; Christine Harper in New York at charper@bloomberg.net .