“Even as their traditional trading strategies are drying up, hedge funds’ coffers are creaking with cash. So some of the biggest funds have decided to take a page from the playbook of buyout funds — well, most of the book, actually — and get into the business of buying companies,” writes Henny Sender in today’s Wall Street Journal.

“Just how serious these funds are about their new business line was underscored last week when a group of about a dozen hedge funds made it to the final round of bidding for the Texas Genco Holdings Inc. unit of CenterPoint Energy Inc.”

“In early spring, invitations to participate in the auction of the merchant energy company went out to about 100 potential buyers, including other power companies and the usual suspects: the megabillion investment funds, including Kohlberg Kravis Roberts & Co. and Blackstone Group. But in May, as the list of potential acquirers for Genco was being winnowed, a group of hedge funds unexpectedly got in touch with Citigroup Inc., which was orchestrating the auction, and notified investment bankers of the funds’ interest in acquiring Genco.”

“Last week, a group made up of Blackstone, KKR and two other big-name private-equity funds, Hellman & Friedman LLC and Texas Pacific Group, won the prize, agreeing to buy Genco in a deal valued at $3.65 billion.”

“But the hedge funds in the running were powerful contenders, lasting to the final round of three bidders. Some of these hedge funds, or private investment pools, had war chests of $10 billion or more, which would make them major players in acquisitions, except that the funds traditionally haven’t been involved in takeovers. Indeed, most of the hedge funds are barely known beyond their own clubby world consisting of other funds run by tight-lipped managers on behalf of wealthy investors and institutions.”

“The hedge funds’ presence and persistence at the Genco auction is one more indication of their growing clout across all financial markets and activities. Though the funds are new to acquisitions, as the Genco auction showed, they are expected to get up to speed soon and become formidable competitors.”

“Such activity goes against type for hedge funds, which have always eschewed both the limelight and a long-term investment horizon. But as the funds accumulate ever-more-massive pools of capital, they can no longer just deploy the money in short-term trading of everything from Australian dollars to the shares and bonds of merger candidates.”

“And as they look for other homes to put their money, hedge funds are increasingly competing with private-equity funds, which also target similar investors to provide their capital, such as pension funds, endowments and wealthy families. These private-equity funds, which buy private companies and then aim to sell them later at a profit, are looking enviously at the ability of hedge funds to trade in and out of public companies.”

“At the same time, hedge funds — which generally allow investors to withdraw their money as often as every month — hope that the acquisitions business will allow them to hold on to customers for longer stretches.”

” ‘By making longer-term, less-liquid investments, the hedge funds can ask their investors to leave money with them for a longer time,’ said Hartley Rogers, vice chairman of Hamilton Lane, a Philadelphia-based alternative investment and advisory firm.”

“As they venture into acquisitions, hedge-fund managers may end up being better, or at least more frequently, compensated than private-equity managers. Private-equity funds pocket performance fees only after they sell on the companies they have bought, a process that can take several years. But hedge funds estimate the value of their positions at year end, and managers pay themselves performance fees accordingly, though, as Mr. Rogers points out, the hedge funds’ valuations of the companies they own might be purely theoretical.”