Co-Head of Blackstone’s Hedge-Fund Business to Leave Firm, Officials Say

People close to Mr. McCormick, 53 years old, said he may pursue opportunities in academia in the future. He will “stay on as needed to ensure a smooth transition in the next few months,” a Blackstone spokeswoman said.

The move is sure to reverberate through the hedge-fund industry, given the unit’s heft and influence. BAAM, which also buys stakes in private-equity firms, backs new hedge funds and makes investments of its own, manages $81 billion.

Its core, $50-billion-plus fund-of-funds strategy has posted low absolute returns for years, reflecting a conservative strategy that caused it to largely miss out on rich gains many hedge funds scored investing in fast-growing public and private companies. Blackstone is now trying to boost those returns, part of a larger embrace of growth investing in recent years.

Blackstone in 2018 set a goal of reaching $1 trillion in assets by 2026 and has been barreling toward that target due to explosive growth in its private-equity, real-estate and credit businesses. The firm managed $731 billion at the end of September, a 60% increase over the same period in 2018. BAAM is Blackstone’s smallest unit and its assets have remained flat over the period, though it has posted strong returns so far this year, with distributable earnings climbing by 50% over the first three quarters compared with the same period in 2020.

In an interview with the Journal, Blackstone President

Jonathan Gray

praised Mr. McCormick as a strong business builder and said he didn’t want him to leave. He also said the hedge-fund business could be significantly bigger. To get there, he and Blackstone Chief Executive

Stephen Schwarzman

have tasked Mr. Dowling with boosting the returns of the fund-of-funds product, BAAM Principal Solutions, or BPS, and continuing to expand offerings that take on more risk. Mr. Gray also said he wants to increase BAAM’s direct-investment capabilities.

In the past several months, Mr. Schwarzman, who in recent years had pulled some of his personal money from BAAM funds, and Mr. Gray each invested $100 million into the unit’s products.

“Steve has been a significant investor in BAAM over the last 25 years, and continues to be,” Blackstone said in a statement.

Under Mr. McCormick’s watch, BAAM expanded beyond buying stakes in hedge-fund firms and launched higher-margin products. Mr. McCormick, who joined Blackstone 17 years ago and became head of BAAM in 2018, also helped launch its first alternative mutual fund in 2004 and started the firm’s data-science initiative.

The pace of change at BAAM has been rapid since Mr. Dowling joined, becoming the first outsider to run the business since its 1990 founding. Mr. Gray has said Mr. Dowling’s record at Brown, whose endowment under his oversight invested heavily in hedge funds and was a top performer, drew his attention. Mr. Dowling made big bets at Brown, including on growth managers, and used his Rolodex to access exclusive funds and club deals.

At Blackstone, he has gained a reputation as a quick decision maker reliant on his own instincts, analysis and network. He has brought a new focus on equities and concentrated, thematic bets, and has retooled BAAM’s due diligence process so he has a bigger hand in manager selection.

In the core BPS fund-of-funds strategy, Mr. Dowling has pulled back on credit exposure by 20% and upped equities exposure by 30%, said a person familiar with the matter.

One of Mr. Dowling’s highest-profile initiatives has been the launch of a roughly $2 billion technology crossover fund called Horizon that invests in fast-growing companies right before they go public or at the time they do so. Horizon has no limits on volatility, meaning it can experience large gains and losses.

Mr. Dowling has had to adjust to Blackstone’s culture after years running his own hedge fund and then Brown’s lean endowment staff. Soon after he joined, Mr. Gray and others had to ask him to respond more quickly to emails, said people familiar with the matter. Mr. McCormick is a cerebral former McKinsey & Co. consultant steeped in Blackstone’s culture who is seen internally as a counterweight to Mr. Dowling.

There has been significant turnover at BAAM’s senior levels. About 70% of the BAAM team that buys stakes in alternative investment firms has left this year, said people familiar with the business.

Several clients have asked for organizational charts to help keep track of turnover, the people said.

“Invariably, when you have an organization and you’re trying to enhance performance and you bring in an outsider, there are going to be some people who aren’t as aligned with that,” Mr. Gray said. “I look up at the scoreboard and, so far, the scoreboard’s going well.”

He added: “Joe is a world-class investor and leader who has already had an enormous impact. We have huge confidence in the business going forward.”

Blackstone said in its third-quarter earnings call last week that it expects to finish raising roughly $5.5 billion for its second stakes fund before the end of the year, exceeding its $4 billion target.

Mr. Dowling’s quick reworking of BPS’s pool of managers contributed to its strongest return in years, Mr. Gray said, with its main performance metric gaining 13.3% in the 12-month period ending in September, versus 8.9% for the HFRX Global Hedge Fund Return index. BPS also made money in September, when the S&P fell 5%, Blackstone said on the earnings call.

Write to Juliet Chung at juliet.chung@wsj.com, Miriam Gottfried at Miriam.Gottfried@wsj.com and Dawn Lim at dawn.lim@wsj.com