Morgan Stanley Hedge Fund Spin-Off Wins $500M From Blackstone

A Morgan Stanley proprietary-trading desk being spun-off as a hedge fund later this year has raised more than $500 million from the Blackstone Group—without giving up a piece of itself.

PDT Partners launched its first fund in June and will fully split from Morgan Stanley by the end of the year, as the bank moves to comply with the Volcker rule, which strictly limits banks' investments in hedge funds. The New York-based firm plans to launch a second fund with about $1.5 billion in January, Bloomberg News reports.

Investors appear to be willing to make some pretty big concessions to get their money into the former process-driven trading desk, led by Peter Muller. Blackstone ponied up its half-billion without demanding a stake in the new firm, as it usually does for such large investments. And Muller has reportedly ruled out fee discounts and imposed a seven-year lockup on some of the $2 billion raised, virtually unheard of provisions in the current hedge fund environment.

PDT has returned an average of 20% a year since its debut in 1993.

Morgan Stanley owns a stake in PDT, less than 5%, although it is unclear whether it will hold on to it; PDT has acquired some Morgan Stanley assets as part of the spin-off. The rest of the firm is owned by its 11 partners, although Muller himself owns a majority stake.

PDT has 100 employees, including CFO Brian Thomas and chief compliance officer Ajay Salhotra.