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Hedge Funds Going Public

July 28, 2011 | About:

Hedge funds have a notorious reputation that has more often than not being sensationalized by the media. The Germans have a phrase for it, Schadenfreude, from the German terms "schaden" and "freude" which mean taking delight in another's misfortune. After all, the public seems to have a penchant for colorful stories about the secretive, unregulated industry or the disaster tale of Long Term Capital Management. However, hedge funds churning out decent returns remain uncelebrated where they laboriously toil in the background.

There is an underlying importance of hedge funds, e.g., short sellers provide liquidity to the market when there is dearth of buyers, they provide daily liquidity to the market by taking long/short positions, with a constant churn to scalp for profits or to short stocks that are overvalued due to “irrational exuberance.”

For those more adventurous who wish to partake in the volatile returns the market has come to offer, Fortress Investment Group LLC (FIG), The Blackstone Group (BX), Och-Ziff Capital Management (OZM), and GLG Partners, Inc. (GLG), four of the US hedge funds publicly traded may be of interest to you (see disclosure). As pointed out in the article below “Despite almost flat performance this year, many investors still see hedge funds as the best way to survive and profit from volatile markets." Read more on hedge funds going public (my own emphasis in bold).

Ebullient hedge funds weigh up IPOs again: http://www.reuters.com/article/2011/07/27/uk-hedge-funds-idUSLNE76Q03M20110727

With choppy markets and fears over the euro zone debt crisis persuading many managers to keep investment bets off the table, owners of hedge funds that have prospered in the wake of the credit crisis have instead been looking at ways of capitalizing on their success, executives say.

And following the success of launches such as Brevan Howard's BH Global (BHGG.L) and BH Macro (BHMG.L), managers are also looking at floating closed-ended funds to give themselves a pool of "permanent capital" that is harder for investors to withdraw during a crisis.


While clients can flee hedge funds in tough times — investors pulled out nearly $300 billion net in 2008 and 2009 — listed funds tend instead to see their shares trade at a discount to net asset value without leaking assets, although listed fund MW TOPS did let clients cash out during the nadir of the credit crisis.

"It's been very recent talk," said Benchmark's Chelo. "The reason they want permanent capital makes sense.

"If you're an activist manager with a stable base of capital you can use it to effect change, or (if you're) a relative value manager who may use leverage, (you would be able to say) 'no matter what happens in the market, I have a pool of capital'."


Hedge funds will be hoping to capitalize on buoyant investor interest and renewed inflows into the industry over the past two years. Despite almost flat performance this year, many investors still see hedge funds as the best way to survive and profit from volatile markets. The flotation of an individual fund can also be a prelude to an IPO of a fund management firm, as a listed fund can persuade potential stock investors that the management firm has more stable assets, but listed hedge fund firms have not always fared well.

"In 2007 there was a decent run (of hedge fund IPOs). The hedge fund IPO market was closed in 2008 and 2009, but there's been some renewed interest and several are waiting in the wings," said Barry Bausano, co-head of global prime finance at Deutsche Bank.

"This activity is a decent barometer of risk appetite in the market."


Disclosure: No positions in any of the stocks listed above but may initiate it within next 24 hours.

About the author:

Graduated with BA Economics from National University of Singapore. Passed Level 1 of the CFA examination and CAIA Level I Candidate. Long-biased US equities, with strong focus on small to mid-cap stocks (NYSE, NASDAQ, AMEX, OTC & ADR) utilizing fundamental and technical analysis.

Agnostic investor, trader, writer and perpetual student of the market.

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