Hedge funds are now going public. Is this the sign of the top, or the beginning of a new manic leg up? Who can say? But when a private hedge fund sells its shares to the public, and the IPO is 25 times over-subscribed, something extraordinary is happening.
Financial News U.S. reports that, “Fortress Investment Group (NYSE: FIG), which on Thursday will become the first US hedge fund and private equity group to go public, is generating intense demand for its shares among investors anxious to grab a slice of the flotation, which values the company at about $7.4bn (€5.6bn). A source close to the deal said demand for the shares was “insane and ridiculous” saying it had far surpassed expectations of the deal’s book- runners and Fortress’s management. The listing roadshow has been in progress for a week and the deal is now up to 25 times subscribed. A meeting took place in New York on Wednesday at which many allocation decisions were due to be made.”
Surely some hearts will be broken among the newly rich who cannot own the newly minted shares of Fortress. They will be on the outside looking in. But perhaps being on the outer edges of a slightly maddened crowd is not such a bad place to be. It certainly doesn’t seem to bother the investment bankers who are taking the hedgies public.
“Hedge funds paid up to $50bn (€38.4bn) in fees and interest to investment banks last year, according to research by Dresdener Kleinwort. They contributed a quarter of investment banking pre-tax profit, estimated Stefan- Michael Stalmann, the banks analyst, eclipsing traditional activity such as dealmaking. The payments to investment banks are equivalent to a 4% annual fee on the industry’s $1.3 trillion of assets, which comes on top of charges by managers of 4% to 5% of assets. Typically these are structured as an annual 2% charge plus a fifth of profits – so to generate returns needed for investors Stalmann said hedge funds had to find investments producing 20% a year.”
Let’s see, investment bankers make money no matter what. Hedge funds (with assets surpassing all of Australia’s superannuation assets) pay 4% in fees and have to find investments producing 20% a year. No wonder the hedge funds are going public. It is the only alpha left in the world, duping the public out of its retirement cash.