AmEx Bucks the Hedge Fund Trend

Starkly contrasting the endless stories about the explosion of hedge funds, American Express (AXP - Cramer's Take - Stockpickr) is closing down half of its U.S. hedge funds while downsizing its entire U.S. fund of funds operations. Amex's alternative investment business fell victim to a combination of factors; a spin off combined with the challenge of making it in an overcrowded, ultra-competitive U.S. market.

In February of last year, Sam Perruchoud, a Geneva-based Amex senior director and the architect of its fund of funds business, became the head of a newly created global fund of funds platform he had spent years building. This platform was the result of the integration of American Express Bank and American Express Financial Corp.'s (AEFC) fund of funds business. Perruchoud's group had more than $1 billion under management and was operating out of Geneva, New York and Minneapolis.

A year later, Amex announced the spin off of American Express Financial Advisors (AEFA), its financial network of more than 10,000 financial advisors. The announcement stated that Amex was trying to concentrate on its credit card franchise and very little attention was paid to the alternative investment activity of the company. In May, Amex renamed the AEFA unit Ameriprise Financial as part of the spinoff plan to become effective Sept. 30.

Ameriprise will host Amex's single hedge fund business, under the RiverSource Alternative Investments brand name. Christopher Keating, who joined in May from Fidelity Management Trust, will head up the group.

But what of the fund of funds business? Senior executives at Amex corporate had to make a tough choice. Should the fund of funds assets and people be transferred to AEFC or the Amex Bank? After all, both entities had contributed to the emergence of the global platform. They opted for the bank, where the bulk of the business had been built. Perruchoud himself was a former American Express Bank official.

However, the choice was not without implications. Because the bank is not a Registered Investment Advisor (RIA), Amex is now in the process of closing down its approximately $150 million U.S.-based fund of funds business, as it cannot do business in the U.S. for regulatory reasons. The rest of the assets, approximately $1 billion, will be transferred to the bank by Sept. 30.