British Insurer Aviva to Shutter U.S. Hedge-Fund Arm

The Aviva unit, a so-called fund of hedge funds that invests money across a range of external managers, had roughly $2 billion under management and boasted relationships with some of the most high-profile firms in the industry including the activist investors William Ackman and Keith Meister, the people said.

“Following a comprehensive review of our business, we have decided to exit the business of investing in third-party hedge funds,” an Aviva spokesman said in a statement in response to questions from The Wall Street Journal. “We are working with our affiliates and the underlying hedge fund managers on an orderly transition plan.”

The move comes at a delicate time for Aviva, a three-century old company that provides general insurance, life insurance and pensions from its London headquarters. It is trying to convince investors to support its pending multibillion-dollar takeover of Friends Life Group Ltd. to create the largest insurance, savings and asset-management company in the U.K.

Aviva has said the combined group would be “better positioned to take advantage of the evolving U.K. life insurance market with greater capacity to invest and innovate.” The firm’s London-listed shares traded down 6% this week after the acquisition was announced.

The closing of the funds-of-funds unit, based in New York, isn’t believed to be related to the takeover. Fewer than a dozen people are expected to lose their jobs, the people familiar said.

Funds-of-funds pool money from clients and invest in hedge funds, adding their own sometimes-hefty fees in the process. While hedge funds have traditionally collected a 2% annual management fee and 20% cut of all profits earned—the proverbial two-and-20—using a fund-of-funds can inflate the cost by as much as 50%.

The Aviva fund carries a 0.8% management fee and reserves the right to take an undisclosed cut of performance gains, according to a filing.

The industry has been under intense pressure since the financial crisis, when a combination of market losses and investor panic stemming from money manager Bernard Madoff ’s Ponzi scheme convinced many wealthy individuals and institutions they were better off selecting hedge-fund managers on their own.

In total, funds of funds world-wide oversee $762 billion, down from $1.16 trillion at their peak in 2008, according to data and research firm HedgeFund Intelligence.

To adapt, some of Aviva’s competitors have sold themselves to bigger players like the Man Group PLC, the world’s largest publicly traded hedge-fund firm. Others reinvented themselves as specialists in discovering talent in small hedge-fund managers, or as experts in particular strategies.

“It’s increasingly difficult to sustain a competitive advantage unless you can differentiate yourself,” said Tom Mahoney, senior managing director at Tangent Capital Partners LLC, a New York investment bank specializing in alternative investments. “A fund-of-funds that is comprised of the largest managers in the hedge-fund space is a challenging proposition.”

Aviva occupied a middle ground. Its underlying managers have included highflying activist firms Corvex Management LP, run by Mr. Meister, and Pershing Square Capital Management LP, run by Mr. Ackman, the people familiar said. The firm also invested with Discovery Capital Management LLC, which bets on global economic trends but has been struggling this year, the people familiar said.

Those hedge funds will likely have to pay back Aviva’s money by the end of the year, which could require them to sell off assets if they don’t have the cash on hand or sufficient fundraising coming in to offset the redemption.