A big piece of news making the rounds this week is the impending IPO of Fortress Investments, a very large money management firm that run’s several Private Equity Funds and Hedge Funds. This is a trend expected to pick up steam this year, as Hedge Fund management firms are looking to monetize on their sticky assets and large fees. As a point of clarity, readers should remember that there is a difference between a Hedge Fund management company going public and a fund itself going public. When one buy’s shares in a management company, then one is investing in future fees collected for money management. When one invests in the shares of a fund itself, then one’s returns are dependant on the funds successful investments, the same way shares of a listed Mutual Fund go up and down with its stock holdings.

Although Fortress is the first Hedge Fund management company going public here in the US, others have already traveled down this path abroad, especially in the UK. Here is a portfolio of public fund companies. Some manage Hedge Fund like products exclusively, while others (like Fortress) run other kinds of investment vehicles as well. Some of these firms have done very well since their IPO, while others have lagged. Personally I do not see a clear investment theme here, but I do think the IPO shares are going to be in demand at first thanks to all the buzz. In the long term, I am skeptical about the kinds of valuations some of these Hedge Fund management firms are getting, whether during an IPO or a private investment such as the one JP Morgan made in Highbridge Capital 2 years ago. On a pure cash flow basis, Hedge Fund management firms are great investments because they charge very high fees on large pools of capital that tend to be locked up or very sticky. But Hedge Fund returns have lagged the market in recent years, while industry volatility of returns is mirroring that of the stock market more and more everyday. It is very foreseeable that the fees large funds charge start converging with those of standard asset management firms just as the services they provide already have.

So is there a clear way for investors to benefit from the Fortress IPO? One option is to look at the stock Fortress holdings on Stockpickr. Even though this is a management co raising capital and not the fund itself, one could speculate that those who cash out on the IPO could reinvest some money into the fund itself, making the fund have to add to its existing holdings. The trouble with this thesis is that Fortress is a multi-strategy firm, so it is always harder to piggy-back their holdings then it would be for a standard long/short or activist fund.

Omid Malekan