Opinion on Hedge Funds going public

Discussion in 'Trading' started by Soon2Bgreat, Feb 21, 2007.

  1. This is a short opinion piece i'm writing for a class. It's a first draft and not at all complete. I wanted to get ET's take on how viable some of my assumptions were and if i'm grossly out of line anywhere. (i very well could be)

    Any input is appreciated...just want your guy's 2 cents.

    "The IPO of FIG or Fortress Investment Group on February 9th, 2007 marked an important moment in the US equities market, and maybe more importantly in the US ‘Hedge Fund’ market that has so controversially been in the limelight as of late. With a volume and ‘efficiency’ unseen in previous years investors are keen on seeking alternative investment areas such as Hedge Funds, Private Equity Funds and diversifying into markets previously untapped.

    Many welcome the increased presence of Hedge Funds as they inject new liquidity into smaller markets and offer qualified investors a more diversified investing option with the promise of larger returns. In the post Enron days where publicly traded companies are bogged down with enormous Sarbanes-Oxley conformation costs, the idea of an ‘efficient’ investment vehicle not restrained to many of the typical downsides of the Large Caps or your broker’s mutual fund has become overwhelmingly attractive. The only regulation or barrier of entry is the relatively high cost of being a qualified investor. The SEC has largely left Hedge Funds unchecked due to the idea that if an investor is qualified to invest, he is qualified enough to accept the larger risk associated with these types of investments.

    Here poses the problem of FIG, not a month removed from its IPO. All of a sudden your sister’s delinquent boyfriend can now invest in a Hedge Fund. This wouldn’t be such a problem if speculators and investors understood the nature of the instrument they were trading. But with market prices where they are today, and with the incredulous and more importantly, unsustainable P/E ratio’s put forth by some companies these days, it’s as if the inevitable has only creeped closer.

    But so what, all the P/E ratios are high across the board, everyone is making money hand over fist and even oil is cheap. Therein lies the rub; what happens when the market comes to collect on our transgressions and industry giants such as Goldman will struggle to maintain their P/E of 12:1? What kind of move can we expect from FIG with a P/E of 42:1? Undoubtedly that’s an absurd valuation and someone will be left holding the bag. Guess what, it won’t be the big boys.

    The question then becomes why did they go public in the first place and who makes out in the end. Of course the game is already over by the time they’ve gone public, as FIG was originally valued at 16-18, and amazingly opened up 89% at ~$32, only to steadily decline since. The fund has won, and the game is done by this point, FIG is now another mediocre equity amongst a sea of mediocrity only to be dangerously speculated upon by small fish. It’s no surprise FIG went public at this time. It’s the height of their size and the height of the market. They are simply banking profits and collecting capital without redemption obligations when the getting is good, while shooing the retail trader to the back of the queue for his cut. It’s unlikely that this capital will give much long term stability to an almost unsustainable industry. If anything it could enable a more spectacular downfall not unlike Long Term Capital Management and Amaranth.

    From here on out it seems there are only two plays. The choices are more strict regulations or continue down the rabbit hole. If we continue down the rabbit hole we could end up like our Aussie cousins from down under. Hedge Funds bear more resemblance to stocks than typical US funds. They trade them regularly and with as little as it takes to buy a CD at your local bank. Of course, the old adage you get what you pay for applies here as well, where most of the funds struggle to even beat the market. It seems inevitable that if more supply is created to meet the large demand for Hedge Funds then we’ll only be sacrificing quality and investing in small corporations of mediocre traders who only serve to increase your risk of ruin as a retail trader. Once it gets to this point, the lack of transparency will surely hurt the funds as there will be one fund who oversteps its ethical bounds, triggering a rash of SEC regulations that could cripple the industry.

    Hedge Funds are like an elite club that everyone wants to be a part of. They are the VIP room at Studio 54. Once everyone is allowed in, it takes away from the mystique and appeal. The more people there are the more crowded the room gets and eventually the VIP’s of actual value end up leaving to pursue their endeavors elsewhere, where they can find the privacy they originally sought out. What’s left is a bunch of people late to the party who are sweaty and tired from struggling to get to the front of the line, only to find an empty room that’s already been trashed by the previous occupants.

    We need the SEC to intervene and set forth stricter investment requirements for Hedge Funds, or else the disasters of LTCM and Amaranth are sure to pale in comparison to what the state of the industry will look like in the coming years. "

    -Thanks all
  2. Hedge funds are the most overrated(?spelling) thing out there ! Half of them are struggling to beat inflation let alone achieve true alpha. Down under in Australia a granny with about USD$500 can get a small piece of the action. They have same treatment as mutual funds.


    Here in Europe countless hedge funds a folding including one run by former Bank of England top brass. I bet you if you took 9 good private "retail" traders from this board, locked them away for 2 years, they would beat most funds !!!
  3. I agree with this.

    90% of hedge funds are designed to be pure "skimming operations".

    Just start 10 very cool sounding "hedge funds"...
    Bring a "name person" on board...
    Then follow Strategy A with 5 of them...
    And do THE OPPOSITE with the other 5.

    You will make a killing with the 5 winners...
    And still get a 2% management fee on the dogs...
    Which you then fold... and do it all over again.

    People cannot even figure out something this simple...
    Which is worthy of a small-time street hustler.
  4. its just one more way wallstreet has dreamed up to exchange paper for cash and separate people from their money.
  5. virgin


    Hedge funds incorporated in which jurisdiction are allowed to market worldwide ? australia ?
  6. Check out this thread:


    Thanks for not having typos and grammatical errors. While I agree with your overall theme ( you should be bearish on the stock due to a fundamental valuation issue), I don't agree with your conclusion that the SEC should intervene here. The company did an IPO under the current guidelines and the market is voting on its price as I write this. The issue is that price reflects something like 40 times earnings whereas Goldman, a noted 800 pound guerilla, trades at a mere 12x earnings. Retail "sheeple" as they are called, will always be fleeced. The SEC could start way down the food chain on that one, many of the rules set up are meant to keep retail traders in long only stategies for their supposed benefit. How is grandma gonna profit from the short side on FIG? Their first earnings report should be interesting.
  7. If it was my paper:

    First I'd define hedge funds.

    Who is this IPO competing against? Mutual funds or individual stocks?

    Why is there a need for this concept?

    I wouldn't use P/e metrics, some do, I'd skip this part. (It is a paper with your thoughts, swing for the fences in evaluating, it is new concept, management rules here.)

    The IPO is one week old and you're ready to call in the SEC. Skip it, this is not a UFO. (actually though, it could be an unidentified falling object):eek: