HEDGE funds are pouring billions of dollars into Hollywood, hoping to find block-buster returns in the film business that plain, old corporate investments cannot provide.

In the past three years more than $4 billion (£2.1 billion) of hedge fund money has been invested in Hollywood movies, with the lion’s share going to mainstream studios looking for new sources of finance. “Hedge funds are definitely the flavour of the month in Hollywood,” Larry Ulman, the head of the entertainment practice at the Los Angeles law firm Gibson, Dunn & Crutcher, said.

Last week Tom Cruise sparked intrigue among New York financiers when he announced — after his unceremonious dismissal by Sumner Redstone, the head of Viacom — that he had secured $100 million of hedge fund backing for his new production company. The identity of the hedge funds remains a secret. “The fact that Tom Cruise is talking about hedge funds is an indication of how much business they are doing in Hollywood,” Mr Ulman said. If, indeed, the star of the Mission: Impossible franchise has teamed up with investors from the East Coast, $100 million will not get him very far. “$100 million will probably get you about half a Tom Cruise picture,” Mr Ulman, who has spearheaded many of the biggest hedge fund movie deals of the past three years, said.

There are plenty of smaller hedge fund investors nosing around the big studios for a one-off deal, but there are a few players who have gone to Tinseltown with big pools of capital. Relativity Media has raised $1.3 billion in film finance this year through its two Gun Hill hedge funds, which are underwritten by Deutsche Bank.

Relativity will use the hedge fund cash to make 37 movies for Sony Pictures Entertainment and Universal Pictures. So far it has made RV, an unimpressive holiday comedy starring Robin Williams, and Nanny McPhee, which starred Emma Thompson. Legendary Pictures has invested $500 million in 25 Warner Brothers movies, including Superman Returns and Lady in the Water. Legendary, which is backed by hedge funds including ABRY Partners, AIG Direct Investments, Banc of America Capital Investors, Columbia Capital, Falcon Investment Advisors and M/C Venture Partners, struck its multi-year deal with Warner in June 2005. The other big hedge fund-backed producer is Dune Entertainment, an offshoot of Dune Capital Management, which struck a $325 million, 28-film investment deal with 20th Century Fox, the cinema unit of News Corporation, parent company of The Times. Dune has made X-Men: The Last Stand and The Hills Have Eyes.

But many of the movies backed by hedge funds in the past three years have failed to be blockbusters. “You have to be careful when a studio offers a movie to you as an investor. You should really be asking, ‘Why does this project need finance?’,” Mr Ulman, who represented Fox in its deal with Dune, said. He added that that deal was different from others in the industry because the hedge fund had essentially taken an investment in everything to be produced by Fox in a given year.

“You can take the good movies with the bad and make a return, rather than relying on movies that have been cherry-picked for you that might all flop,” he added. In a film finance class that he teaches to postgraduate students, Mr Ulman asks at the beginning of the term why anyone would invest in films. “I tell them you make 3, 4 or 5 per cent return on your investment,” he said.

“One year a student got the right answer — movies are cool. Every time we do business with one of these investors you can guarantee that they want to come on to the lot, they want to meet the stars, they want to go to the premier. That’s what it’s all about.” Mr Ulman believes that Tom Cruise would not make a sound investment for a hedge fund. “Sumner Redstone is a good businessman,” he said. “He would not be getting rid of Cruise if he was going to be making him a dollar. Any hedge fund manager who knows what he is doing should realise that, too. Hollywood is a tough town and Tom’s star has faded.”

FILM INVESTORS

($500 million) — 25 Warner Brothers films, including Superman Returns and Lady in the Water

($1.3 billion) — 37 films for Sony and Universal, including Inside Man, RV, Nanny McPhee and Doom

($325 million) — 28 films at 20th Century Fox including X-Men: The Last Stand and The Hills Have Eyes

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