Hedge fund and traditional money management firms hard hit by last year's market meltdown are poised for a surge of mergers and acquisitions to bolster depleted assets and widen sources of revenue.

We're going to see a massive wave of consolidation across the entire asset management industry, over the next 12 to 24 months, Brian Reilly, Barclays Capital's head of asset management investment banking, told a gathering of hedge fund executives at the SkyBridge Alternatives Conference.

Driving deal activity is the need to bulk up assets, particularly at businesses that have shrunk in size over the past year but still have the old infrastructure, computer systems, research and investment teams.

Another driver of deals, he said, is big firms rounding out their offerings by acquiring funds that specialize in different regions or markets. Among Barclays' clients, Reilly said, is a multi-strategy fund that wants to expand into credit markets and a European firm eager to expand into the United States.

Other likely sellers, he added, are financial institutions under pressure to boost capital.

There already has been a number of hedge fund transactions, mainly distressed situations where fleeing customers force managers to sell or liquidate.

Reilly observed that deal activity among fund managers for the past year is better described as rationalization, rather than strategic mergers.

In March, for example, hedge fund manager Stark Investments bought the assets of Deephaven Capital Management's flagship multi-strategy fund, gaining $1.2 billion in new assets at a distressed price.

But the structure of hedge funds, where managers do not earn big bonuses until they recover last year's losses, will be an important factor.

You've got funds with high water marks, they can't raise assets, they can't pay their people, Reilly said.

Consolidation and rationalization will also hit firms that invest in other hedge funds, said Brian Sears, global co-head of Neuberger Berman's NB Alternative Advisory & Placement Group.

Sears told attendees his firm has had discussions with general partners looking to consolidate with other managers.

The fund-of-funds business is under fire from investors angry about being unable to redeem their money last year, disappointing returns and the failure of many managers to avoid Bernard Madoff and other frauds.

We're getting calls from funds of funds. They're out of business for the obvious reasons, Sears said. There are funds that had billions of dollars under management and are now drastically lower.

Reilly's employer, Barclays Plc , has in the past few months put its iShares exchange-traded funds business up for sale. Lehman Brothers, the investment bank acquired by Barclays out of bankruptcy last fall, recently completed the sale of its Neuberger Berman unit.

Barclays, meanwhile, is reported to be considering the sale of its entire money management division, the San Francisco-based Barclays Global Investors, as the British bank receives a new round of iShares bids.

Reilly declined to comment on iShares, but he said his group was working on a few things that could be a huge event for the money management industry.

(Reporting by Joseph A. Giannone; Editing by Gary Hill)

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