“Permanency of capital is the Holy Grail for hedge funds,” says Stuart Davies, global head of investments for Jericho, New York–based Ivy Asset Management Corp., which manages $16.6 billion in funds of hedge funds. “It enables managers not only to withstand a storm but, more importantly, to take advantage of the huge opportunities that become available when one hits.”

   The quest for permanent capital has spurred deal activity, with hedge fund firms like London’s Lansdowne Partners and New York–based Avenue Capital Group and D.E. Shaw Group selling minority stakes to major investment banks. In March, Lehman Brothers purchased 20 percent of D.E. Shaw, No. 4 on our list, with $27.3 billion in assets. Last October, Morgan Stanley paid roughly $300 million each to Lansdowne (No. 14) and Avenue Capital (No. 32) for 19 percent stakes.

   Teaming up is proving beneficial for hedge funds and Wall Street. For securities firms and banks, hedge funds are attractive because of the hefty fees they can generate. Hedge funds are drawn to Wall Street by its deep pockets, brand recognition and marketing strength.

   “You’ve got someone else who is saying, ‘We believe this is someone who is best in class,’” explains Avenue Capital co-founder Marc Lasry, whose firm had $10.6 billion in assets at the end of 2006. Lasry is using the money he received from Morgan Stanley to grow his business, investing it alongside the assets of institutional investors as he launches new hedge fund products.

   Hedge fund firms are also turning to the public markets to raise capital. In February, Fortress Investment Group (No. 33) became the first U.S. hedge fund to go public, raising $634 million in its initial public offering. As of year-end 2006, Fortress had $10.5 billion under management, up from $7.6 billion a year earlier. Because the market so readily embraced Fortress’s IPO — the stock closed its first day of trading at $31 a share, 68 percent above its $18.50 offering price — investors are waiting for other firms to follow suit. One U.S. firm said to be readying itself for an IPO is Greenwich, Connecticut–based AQR Capital Management (No. 45). AQR had $8.9 billion at the end of 2006, up from $7.9 billion last year, when it ranked No. 32.

   U.S. hedge fund firms are late to the IPO game. London-based Man Investments, No. 9 in this year’s ranking, has been public since 1994. With $18.8 billion under management, Man is the world’s biggest listed hedge fund firm. Nonetheless, it falls a notch from last year, when it was No. 8, with $12.7 billion. Another London firm, RAB Capital, went public in 2004 and is a new addition to this year’s ranking — though it barely makes the list with $4.9 billion.

   In 2006, Citadel Investment Group was rumored to be considering an IPO, but the Chicago-based firm ended up taking a different approach to tapping the public market. In December, Citadel — No. 18 this year, with $13.4 billion — became the first U.S. hedge fund to issue investment-grade debt when it sold $500 million in five-year bonds.
Large capital pools and ties to securities firms don’t guarantee success. Early this month Swiss banking giant UBS announced it would pull the plug on its U.S.-based Dillon Read Capital Management hedge fund business after the group lost $124 million on investments in the U.S. subprime mortgage market. The bank’s Chicago-based Alternative and Quantitative Investments group ranks No. 71 this year, with $6.2 billion, down from No. 68 a year ago, when it had $4.7 billion in assets.

   Size wasn’t enough to save Amaranth Advisors. Highly concentrated bets on natural gas led to more than $6 billion in losses and the Greenwich-based firm’s ultimate demise. Amaranth ranked No. 39 last year, with $7.3 billion.

   The growth of the hedge fund industry is an increasingly global affair. Of the firms in the 2007 Hedge Fund 100, 23 are based outside the U.S., up from 20 in last year’s ranking. JPMorgan Asset Management’s Staley believes that globalization is still in its infancy. “The major firms are going to be much more active internationally,” he says. JPMorgan is making a hedge fund push into China through its locally branded business arm, Hong Kong–based JF Asset Management.

   In an industry where the actions of the biggest firms are closely watched and mimicked, those of Barton Biggs are promising. In January 2003, Biggs gave up his post as chief market strategist at Morgan Stanley to launch Traxis Partners, a New York–based firm that manages $1.4 billion for Morgan Stanley Investment Management, No. 53, with $7.7 billion in hedge fund assets.