Feb. 9 (Bloomberg) -- Shares of Fortress Investment Group LLC, the first U.S. manager of private-equity and hedge funds to go public, soared 68 percent in their initial day of trading.

The IPO, which raised $634.3 million, gives individual investors access to Fortress's profits from managing funds that are restricted to millionaires and institutions. It made the firm's three founders billionaires and may encourage rival managers to sell shares to the public. The 78 percent stake held by Fortress's principals is valued at $9.7 billion.

``The professional traders are saying this is a jewel of a firm,'' Ben Phillips, managing director of New York-based investment bank Putnam Lovell NBF Securities, said today in an interview. ``This is a firm that has not only built private- equity and hedge funds but has shown it can shift with the market and build whatever business is needed next.''

The shares rose $12.50 to $31 at 4:01 p.m. in New York Stock Exchange composite trading, giving Fortress a market value of $12.4 billion. Man Group Plc, the world's largest publicly traded hedge-fund manager, is worth $21.7 billion, while 3i Group Plc, the largest listed private-equity firm, is valued at $10.2 billion.

It was the biggest first-day increase by a financial- services IPO since Nymex Holdings Inc., operator of the New York Mercantile Exchange, climbed 125 percent on Nov. 17. National CineMedia Inc., a Centennial, Colorado-based seller of cinema advertising, this week raised $882 million, the biggest IPO so far this year.

Rapid Growth

Fortress was founded as a private-equity firm in 1998 by Wesley Edens, 45, Robert Kauffman, 43, and Randal Nardone, 51, who came from Swiss bank UBS AG and New York-based BlackRock Financial Management Inc. Edens's stake is worth $2.1 billion, while Kauffman and Nardone each own $1.6 billion of shares. The other two principals are Peter Briger, 43, and Michael Novogratz, 42, both Goldman Sachs Group Inc. partners who were hired in 2002.

The executives have expanded Fortress into hedge funds, real estate and debt securities. Assets have more than doubled to $30 billion since March 2005, in part through investments from institutions like Oregon's public pension fund. Earnings rose almost fivefold to $158.7 million in the first nine months of 2006 from the same period a year earlier.

Fortress sold 34.3 million shares, or 8.5 percent of the total, for $18.50 each, the top of the target set in its Feb. 5 regulatory filing. They began trading at $35 and reached $37 before falling back. The underwriters have an option to sell 5.1 million more shares. The company plans to use money to start funds, compensate employees and finance acquisitions.

Premium Valuation

Nomura Holdings Inc., Japan's biggest securities firm, in December bought a 15 percent stake in Fortress for $888 million. Its holdings, for which it paid $16.12 a share, dropped to 13.7 percent after the IPO.

The first-day gain valued the company at about 37 times distributable earnings, a combination of asset-management and performance fees available to shareholders, Phillips said. That compares with about 27 times earnings on average for large, publicly traded money managers including Baltimore-based T. Rowe Price Group Inc. and San Mateo, California-based Franklin Resources Inc.

``Clearly Fortress emerged at a premium,'' Phillips said.

IPO buyers included many hedge-fund managers, said Steven Howard, a partner in the investment-law practice at Thacher Proffitt & Wood LLP in New York, who expects other U.S. hedge funds and private-equity firms to go public.

``It will take maybe six months before other funds will take steps to follow Fortress.''

Fund Returns

Investors poured record amounts into hedge funds and buyout pools last year. Buyout firms raised $401 billion worldwide, according to data compiled by London-based Private Equity Intelligence Ltd. Net deposits into hedge funds were $126.5 billion, according to Hedge Fund Research Inc. of Chicago.

Fortress's $17.5 billion in private-equity funds have returned a net 39.7 percent a year from 1999 through September, according to SEC filings. The Standard & Poor's 500 Index was roughly flat in that period.

Fortress's hybrid hedge funds, which invest in distressed debt and other securities, have returned 13.7 percent a year since 2002, and its liquid hedge funds investing in currencies, debt and stock and commodity markets have had net returns of 14.2 percent. Those gains compared with a roughly 10 percent advance by the S&P 500.

Fortress manages about $9.4 billion in hedge funds.

U.S. alternative-asset managers running hedge, buyout and real-estate funds lag behind their London-based counterparts when it comes to selling shares to the public. Man Group and 3i Group had IPOs in 1994. Shares of Man Group have more than doubled in the past two years, and 3i climbed 33 percent.

Individual Investors

Citadel Investment Group LLC, a Chicago-based hedge-fund manager run by Kenneth Griffin, in December sold $500 million of five-year notes, the first-ever sale of bonds by a hedge-fund manager.

Individuals normally barred from investing in hedge funds by minimum wealth requirements could buy a stake in Fortress's management company through the offering, or on the open market after the shares start trading.

Shareholders would be different from clients of the hedge funds because they would own a piece of the management company, not the underlying investments that the fund buys with client money.

New York-based buyout firms Apollo Management LP and Kohlberg Kravis Roberts & Co. last year raised money for publicly traded funds in Amsterdam. Apollo and KKR didn't sell shares in their management companies.

Shares of Apollo's AP Alternative Assets LP have fallen 2.5 percent since they began trading in August. KKR Private Equity Investors LP has dropped 6.6 percent since its start in May.

The Fortress sale was managed by Goldman Sachs Group Inc. and Lehman Brothers Holdings Inc., along with Bank of America Corp., Citigroup Inc. and Deutsche Bank AG.

To contact the reporters on this story: Jenny Strasburg in New York at jstrasburg@bloomberg.net; Elizabeth Hester in New York at ehester@bloomberg.net.

Last Updated: February 9, 2007 16:31 EST