Investment banks in Europe are lining up for a bigger slice of business from hedge funds, which are moving deeper into the M&A arena hoping for juicy returns from a boom in private equity deals, bankers say. Hedge funds are already huge money-spinners for investment banks, accounting for around 12.5 percent of their revenues last year, from activities such as lending stock for short-selling or clearing and settling trades.
Now banks see fresh opportunities to boost revenue from hedge funds, which are increasingly seeking merger and acquisition (M&A) or corporate finance services.
"The hedge funds are actively seeking to become clients of investment banking departments - that's definitely a trend," said Alex Wilmot-Sitwell, co-head of European investment banking at UBS. "We are re-directing people into that area in Europe."
Hedge funds, which manage an estimated $1 trillion of assets worldwide, have mushroomed as they are free to trade in different markets and make bigger bets than traditional asset managers.
They have become big players in private equity deals that are driving activity in the European M&A market to such a degree that private equity and hedge funds seem to be converging.
Private equity transactions have amounted to more than $40 billion in Europe so far this year, more than in the United States, where private equity deals in the year to date total $36 billion, according to finance industry data provider Dealogic.
There were $147 billion of private equity deals in Europe last year, representing nearly a fifth of all European M&A, Dealogic data shows.
Hedge funds, particularly so-called event-driven M&A funds, now play an active role in private equity M&A situations.
"They are being much more aggressive. They are taking big stakes," said one senior corporate financier.
US hedge fund Elliott Associates reacted strongly to the collapse of a private equity bid for UK retail chain Woolworths last week. Elliott, which held a stake of around 7 percent in Woolworths, called on the retailer's board to give cash back to shareholders by selling the company.