J. Tomilson Hill was a well-known Wall Street deal maker in the 1980s, a skilled merger tactician whose work on the bidding war for RJR Nabisco earned him a role in the book “Barbarians at the Gate,” which memorably said he came across to enemies as “an oiled-back Gordon Gekko haircut atop 5 feet, 10 inches of icy Protestant reserve.”
But in 1993, Mr. Hill’s climb up the ladder at Lehman Brothers ended when he was ousted as co-chief executive, and he spent the next seven years of his career in less prominent roles at the Blackstone Group, the private equity firm.
But Mr. Hill has reinvented himself by applying his deal-making skills to a different business. Since 2000, he has taken Blackstone’s hedge-fund-of-funds business from barely a blip on the radar screen to the No. 1 spot. Its $53 billion in assets are more than double its nearest competitor’s.
At a presentation for analysts in May 2012, Mr. Hill described his business as “the largest investor in hedge funds in the world.” A typical Blackstone fund may be subdivided among a dozen or more hedge fund managers, like William A. Ackman of Pershing Square Capital Management, Paul Singer of Elliott Associates or Andrew Hall, the former Citigroup oil trader. Mr. Hill has succeeded not by posting titanic returns but by offering the funds to institutions like public pension funds as a safer alternative to stocks without as much volatility. Its $8 billion flagship Blackstone Partners Offshore Fund returned 6.3 percent annually from 2000 through 2012, according a Blackstone presentation in mid-2013 obtained from another investor.
While it may look unexciting, that return beat global stock markets, as measured by the MSCI World Index, which returned 1.9 percent annually in the same period. The reason: The Blackstone fund posted healthy gains when markets tumbled in 2000-02, and its 15.6 percent drop in 2008 was less than half the 40.3 percent market decline.
Building this business organically has left some of Blackstone’s rivals like Kohlberg Kravis Roberts & Company, the Carlyle Group and Apollo Global Management trying to compete through acquisitions or hiring teams, said Marc Irizarry, who follows money management firms for Goldman Sachs. Carlyle announced such an acquisition last week. The division now accounts for more than one-fifth of Blackstone’s total assets under management.
This year, Blackstone has focused on the market for individual investors who may want such hedge fund vehicles in their portfolios. In August, it started a $1 billion mutual fund for wealthy clients of Fidelity Investments. Institutions have 25 percent of their assets in alternatives to stocks and bonds, like private equity, hedge funds and real estate, but individuals have only 2 percent, which Blackstone’s president, Hamilton E. James, says “shows you the massive potential that retail has.”
The second act for Mr. Hill, who is 65, has helped him become Blackstone’s third-highest-paid executive officer, with 2012 compensation of $13.7 million. He also owns $506 million worth of Blackstone stock and has sold $45 million worth since the firm went public in 2007, according to InsiderScore, which tracks such sales.
He has homes in Manhattan, East Hampton, Paris, and Telluride, Colo., where he likes to ski. He also has a growing art collection including works by Andy Warhol, Francis Bacon and Brice Marden. His 32 Renaissance and Baroque bronzes will be featured in an exhibition that opens in January at the Frick Collection. Mr. Hill’s contributions to the local arts scene include service as chairman of the board of Lincoln Center Theater and a trustee at the Metropolitan Museum of Art. Still, there are limits. When a museum assembled a Bacon show in 2008, Mr. Hill was asked to lend three of the four Bacons he owns, but he drew the line at two.
The son of a corporate lawyer at a large New York firm, Mr. Hill grew up on Park Avenue, attending the preppy bastions Buckley School and Milton Academy, where he was a varsity wrestler, before attending Harvard and Harvard Business School.
He joined the merger department of First Boston in 1973 and left six years later to become head of mergers at Smith Barney, Harris Upham. Mr. Hill joined Lehman in 1982, where he worked briefly with Peter G. Peterson and Stephen A. Schwarzman before they left to found Blackstone in 1985 after Lehman was sold to American Express.
At Lehman, with the 1980s merger mania in full swing, one former banker recalls that the hypercompetitive Mr. Hill would know exactly how much he weighed before and after workouts in the firm’s gym, where he would sometimes do situps nonstop for 15 minutes. But after three years as co-chief executive alongside Richard S. Fuld Jr., Mr. Hill was ousted by Harvey Golub, the chief executive of American Express.
His front-page ouster from Lehman “was a very jarring experience,” Mr. Hill recalled. “It was very hurtful as well because I thought I had done a good job” engineering merchant banking buyouts that helped the firm’s profits for the next few years. “You deal with the reality of trying to reinvent yourself, and the test of anybody is how they do in adversity.”
“Any normal person would be set back and quizzical about it,” Mr. Schwarzman said. “I don’t think he was in any way a broken person, but he was clearly reflective, and appropriately so.” At Blackstone, Mr. Schwarzman continued, “he sort of sat around, and eventually somebody called him to do something, he did it, and then someone else called, and he sort of got his sea legs back.”
When Mr. Hill took over the fund-of-funds business in 2000, it managed $1.3 billion, one quarter of it for the firm itself and its partners. Referring to his days as a mergers-and-acquisitions banker, Mr. Hill said he used “an M.&A. approach instead of a product approach,” building the business by asking clients what they needed “and not trying to sell them something.”
One of his first big clients, the Pennsylvania State Employees’ Retirement System, asked Blackstone to create a market-neutral fund in 2001, and eventually invested $1.3 billion in it. Five years later, the retirement fund’s chief investment officer at the time, Peter Gilbert, told Mr. Hill at an investors’ meeting of a problem the retirement fund was encountering in investing in a well-known commodity index, as an inflation hedge, because of differences between futures and spot prices.
Mr. Hill was able to find traders who could match or beat the index, including Mr. Hall, who was working then at the Phibro trading unit of Citigroup. “It didn’t just solve our problem, it created a new business line for them,” Mr. Gilbert said.
At the start of 2007, Blackstone ranked No. 14 among fund of funds, according to one industry tally. But during the financial crisis, some competitors imposed delays or “gates” limiting investor withdrawals. Worse, other competitors had exposure to Bernard L. Madoff’s Ponzi scheme. Blackstone, which prides itself on intensive manager research, had avoided Mr. Madoff.
With its network of outside managers and its own private equity team, Blackstone seeks to exploit unusual market moves. When the hedge fund manager John Paulson sold Lehman bankruptcy claims in 2011 amid speculation about redemptions by his investors, Blackstone got one of its managers to spend $600 million buying claims amid a market dislocation. Mr. Hill said the strategy returned more than 30 percent on an annual basis after fees.
The fees are hefty. Blackstone says it often negotiates fee discounts from its managers, but won’t provide details. The mutual fund for Fidelity charges total annual fees of 3.25 percent, with a waiver reducing the total to 2.4 percent — still more than double the average mutual fund. Since it started trading in early August, the fund has gained 3.6 percent after fees.
But the fund-of-funds business is facing pressure as stocks have taken off after the 2008 meltdown. Blackstone’s flagship fund is no exception, trailing the global market’s strong 12.9 percent annual returns from 2009 to 2012 by 5.6 percentage points.
As for his hair, Mr. Hill said he wore it parted in high school but switched to a straight-back style when he grew it longer during the student-protest era when he wrote for The Harvard Lampoon. (That was “back when I had a sense of humor,” he noted.) But he scoffs at the loose talk he has heard over the years that Oliver Stone, the “Wall Street” director, might have modeled Gordon Gekko’s hair on his. “Oliver Stone never met me,” Mr. Hill said. “I don’t think Oliver Stone knows who I am.”