ManyPeaks.com

First and most obvious is the smart money / dumb money issue. If the smart guys are selling, do you really want to be buying? This is a concept to consider with any IPO… but in most IPO’s it’s businessmen & entrepreneurs cashing out, not savvy hedge fund & private equity guys. Fortress didn’t post 39% annual returns in their flagship fund by not knowing when to sell.

It also smacks of regulatory hypocrisy, a timely issue considering the SEC wants to raise net worth requirements for Accredited Investor status — a requirement for entering into any performance-fee investment arrangement including hedge funds. Of course the standard has never prevented individuals from vicariously investing their future income in hedge funds, via their corporate or state pension fund’s investment decision making. (Pensions by the way get bailed out by the federal government when they falter, so in a way aren’t we all investing in hedge funds?)

Allowing non-accredited investors to own Fortress (FIG) shares twists things further. So you, my dear government, are telling me I cannot buy into a private investment fund whose management company gets paid performance fees, but can buy ownership in the management company itself, whose earnings and value derive primarily from the performance of the aforementioned fund? Readers, please comment if any of you comprehend the logic involved with these laws. I do not.

Finally, and most interesting to me, just imagine the performance enhancing trades Fortress will be able to make in their own stock! The stock could be traded as a derivative on fund performance:

• Having a bad quarter in the fund? Buy puts on FIG stock for the managed funds. Even with some separation between fund manager and corporate CFO — a pollyanna theory regardless — the manager doesn’t need corporate info to know when his performance results are weak. And they only run a few large funds.
• Shooting the lights out? Buy shares (or call options) in yourself!

In these examples I’m referring to the fund manager making those trades for the fund, not individually or even for the management corporation. The trades aren’t 100% layups either — sometimes stocks go up on “bad” news & down on the “good.” But they’d at least have a solid idea what the news was going to be.