I'm a doctor, not a hedge fund manager Jim

Aaron Pressman

Boy there's been an awful lot of confusion about Fortress Investment Group LLC's upcoming IPO. The company, which managed $9.4 billion of hedge funds and $17.5 billion of private equity funds (as of 9/30/06), is going public today with the symbol FIG. And all signs point to a blow out, likely above the top of the$16.50 to $18.50 a share range that the company listed in its SEC registration statement.\

So before you get too carried away with the hedge fund euphoria, repeat after me: Fortress Investment Group is not a hedge fund. It's a money manager. If you buy shares of Fortress at today's IPO or in the after-market you are not investing in a hedge fund, you are not making an alternative investment, you are not doing anything all that wacky or way out. Literally dozens of asset managers are publicly-traded including big shots like T. Rowe Price (TROW), Franklin Resources (BEN) and BlackRock (BLK). What's different about Fortress is the firm's area of expertise. And they've posted a darn good track record so far -- private equity funds have gained 40% a year since 1999, while the firm's two categories of hedge funds have risen 14% a year since 2002. But shareholders in FIG don't get those returns and if hedge funds swing out of favor or the markets turn down hard, it probably won't matter.

Now, as BlackRock and more recently Goldman Sachs (GS) have discovered being a publicly-traded company that runs hedge funds can get unpleasant if the funds have a bad year. That's because although hedge funds collect the well known 2 and 20 fees (2% of assets plus 20% of profits), the profit-sharing fee disappears if a fund has a bad year until the fund makes up all the losses. A few years ago, Blackrock spent every quarterly conference call explaining why it still wouldn't be collecting any so-called performance fees from its Obsidian fixed income hedge fund after a bad quarter in 2002.

In the regular hedge fund game, managers may close up shop or move to a rival firm if they get underwater and start losing out on performance fees. Funds owned by public companies usually stay in business. That's good for investors but not as good for shareholders of the manager.

It's also worth noting that you can invest overseas in shares of an Apollo Management hedge fund and a KKR private equity vehicle, which i touched in my recent article in BW magazine (still behind the subscription wall) on private equity investing for the not-quite-super-rich.

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