February 13, 2007
Hedge Funds Going Public—Is that a Good Idea?
Posted by Lisa Fairfax

Last Friday Fortress Investment Group hosted its IPO, the first hedge fund to go public in the US. Apparently appetite for the offering was tremendous. Indeed, it opened at $35 a share, nearly double its offering price of $18.50. And the offering raised $634 million for Fortress. Obviously the public viewed the offering as an opportunity to participate in the tremendous profits hedge funds have been able to generate. But I wonder how going public will impact the ability of the hedge fund to continue producing such profits in the long term.

Based on the (albeit limited) scholarship I have read about hedge funds, I was under the impression that lack of significant regulation was part of the reason such funds were able to produce such robust returns and outperform other firms. Indeed, in a recent article on hedge fund activism, Frank Partnoy and Randall Thomas attribute the success of hedge funds to their ability to utilize financial strategies unavailable to more heavily regulated entities. And there has been some suggestion that, because of the greater risk associated with them, hedge funds should be limited to highly sophisticated and wealthy investors.

To be sure, there have been a lot of calls to better regulate hedge funds, and it could be that Fortress just sees the writing on the wall. But while there may be benefits associated with increased regulation of hedge funds, I am not sure that we can obtain those benefits while retaining the huge profits that public investors are surely hoping to receive. Interestingly, several experts have indicated that if hedge fund managers are selling, then it is probably not a good idea to be buying.

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