According to a report on Bloomberg.com, hedge funds attracted about $60 billion in assets in the first quarter. To ride the wave, asset manager BlackRock (NYSE:BLK) is ramping up its alternative investment business. This week, the company said it will purchase the fund-of-hedge-funds (FOF) business of Quellos Group for $1.7 billion.

An FOF involves managers who invest in various hedge funds and private equity funds. The fund's fees are based on a percentage of the net asset value of the portfolio, as well as the underlying investments' performance. Because of the diversification across different funds, an FOF tends to reduce overall risk.

Quellos generated $131 million in management fees and $170 million in performance fees in 2006. That's fairly lucrative for a firm with roughly $17.4 billion in assets under management.

It's never easy buying alternative asset firms, but BlackRock has enjoyed a long-running relationship with Quellos as a sub-advisor for its clients. BlackRock realizes the value it's receiving, as evident by its hefty $970 million payout to retain key Quellos employees.

If anything, BlackRock is late to the game. Other firms such as Lehman Brothers (NYSE:LEH), Morgan Stanley (NYSE:MS), JPMorgan Chase (NYSE:JPM), and Legg Mason (NYSE:LM) have been doing major deals for alternative asset firms. Then again, BlackRock may have been distracted; it's been working through its complicated merger with Merrill Lynch's (NYSE:MER) asset management business since last October.

Without assuming synergies, BlackRock thinks the deal will add 4% to 6% to its current earnings. But if the FOF business continues to pile up assets and generate reasonable returns, there could be even more upside. Maybe that's why BlackRock's stock traded up 1.1% following the deal's announcement.

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Fool contributor Tom Taulli, author of The Complete M&A Handbook, does not own shares mentioned in this article. He is currently ranked 1,831 out of 30,414 in CAPS.