Summary: Sources in the know report Morgan Stanley will acquire almost 20 percent of Avenue Capital Group, a hedge fund with $12 billion in assets that buys debt of ailing companies. The $280 million purchase is a step by Morgan to catch up with larger rival Goldman Sachs Group Inc. in the hedge-fund ownership department. Additionally, the company may buy part of FrontPoint Partners, a Connecticut-based hedge fund. So far on the year, Avenue Capital's funds in the U.S. and Europe are up about 10 percent - impressive when compared to the many hedge funds that are underperforming the markets in FY2006. The hedge fund industry has already attracted $110.6 billion in new investments through September - considerably more than the $46.9 billion invested in all of 2005. By purchasing only a partial stake in Avenue Capital instead of the whole firm, many of Avenue's managers and traders who have made the fund successful will likely stay put since they are still invested in the firms success.
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Potentially impacted stocks and ETFs: Morgan Stanley (NYSE:MS), Goldman Sachs (NYSE:GS), Bear Sterns (NYSE:BSC), Lehman Bros. (LEH), Merrill Lynch (MER)
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