This is a short opinion piece i'm writing for a class. It's a first draft and not at all complete. I wanted to get ET's take on how viable some of my assumptions were and if i'm grossly out of line anywhere. (i very well could be)
Any input is appreciated...just want your guy's 2 cents.
"The IPO of FIG or Fortress Investment Group on February 9th, 2007 marked an important moment in the US equities market, and maybe more importantly in the US âHedge Fundâ market that has so controversially been in the limelight as of late. With a volume and âefficiencyâ unseen in previous years investors are keen on seeking alternative investment areas such as Hedge Funds, Private Equity Funds and diversifying into markets previously untapped.
Many welcome the increased presence of Hedge Funds as they inject new liquidity into smaller markets and offer qualified investors a more diversified investing option with the promise of larger returns. In the post Enron days where publicly traded companies are bogged down with enormous Sarbanes-Oxley conformation costs, the idea of an âefficientâ investment vehicle not restrained to many of the typical downsides of the Large Caps or your brokerâs mutual fund has become overwhelmingly attractive. The only regulation or barrier of entry is the relatively high cost of being a qualified investor. The SEC has largely left Hedge Funds unchecked due to the idea that if an investor is qualified to invest, he is qualified enough to accept the larger risk associated with these types of investments.
Here poses the problem of FIG, not a month removed from its IPO. All of a sudden your sisterâs delinquent boyfriend can now invest in a Hedge Fund. This wouldnât be such a problem if speculators and investors understood the nature of the instrument they were trading. But with market prices where they are today, and with the incredulous and more importantly, unsustainable P/E ratioâs put forth by some companies these days, itâs as if the inevitable has only creeped closer.
But so what, all the P/E ratios are high across the board, everyone is making money hand over fist and even oil is cheap. Therein lies the rub; what happens when the market comes to collect on our transgressions and industry giants such as Goldman will struggle to maintain their P/E of 12:1? What kind of move can we expect from FIG with a P/E of 42:1? Undoubtedly thatâs an absurd valuation and someone will be left holding the bag. Guess what, it wonât be the big boys.
The question then becomes why did they go public in the first place and who makes out in the end. Of course the game is already over by the time theyâve gone public, as FIG was originally valued at 16-18, and amazingly opened up 89% at ~$32, only to steadily decline since. The fund has won, and the game is done by this point, FIG is now another mediocre equity amongst a sea of mediocrity only to be dangerously speculated upon by small fish. Itâs no surprise FIG went public at this time. Itâs the height of their size and the height of the market. They are simply banking profits and collecting capital without redemption obligations when the getting is good, while shooing the retail trader to the back of the queue for his cut. Itâs unlikely that this capital will give much long term stability to an almost unsustainable industry. If anything it could enable a more spectacular downfall not unlike Long Term Capital Management and Amaranth.
From here on out it seems there are only two plays. The choices are more strict regulations or continue down the rabbit hole. If we continue down the rabbit hole we could end up like our Aussie cousins from down under. Hedge Funds bear more resemblance to stocks than typical US funds. They trade them regularly and with as little as it takes to buy a CD at your local bank. Of course, the old adage you get what you pay for applies here as well, where most of the funds struggle to even beat the market. It seems inevitable that if more supply is created to meet the large demand for Hedge Funds then weâll only be sacrificing quality and investing in small corporations of mediocre traders who only serve to increase your risk of ruin as a retail trader. Once it gets to this point, the lack of transparency will surely hurt the funds as there will be one fund who oversteps its ethical bounds, triggering a rash of SEC regulations that could cripple the industry.
Hedge Funds are like an elite club that everyone wants to be a part of. They are the VIP room at Studio 54. Once everyone is allowed in, it takes away from the mystique and appeal. The more people there are the more crowded the room gets and eventually the VIPâs of actual value end up leaving to pursue their endeavors elsewhere, where they can find the privacy they originally sought out. Whatâs left is a bunch of people late to the party who are sweaty and tired from struggling to get to the front of the line, only to find an empty room thatâs already been trashed by the previous occupants.
We need the SEC to intervene and set forth stricter investment requirements for Hedge Funds, or else the disasters of LTCM and Amaranth are sure to pale in comparison to what the state of the industry will look like in the coming years. "
-Thanks all
Any input is appreciated...just want your guy's 2 cents.
"The IPO of FIG or Fortress Investment Group on February 9th, 2007 marked an important moment in the US equities market, and maybe more importantly in the US âHedge Fundâ market that has so controversially been in the limelight as of late. With a volume and âefficiencyâ unseen in previous years investors are keen on seeking alternative investment areas such as Hedge Funds, Private Equity Funds and diversifying into markets previously untapped.
Many welcome the increased presence of Hedge Funds as they inject new liquidity into smaller markets and offer qualified investors a more diversified investing option with the promise of larger returns. In the post Enron days where publicly traded companies are bogged down with enormous Sarbanes-Oxley conformation costs, the idea of an âefficientâ investment vehicle not restrained to many of the typical downsides of the Large Caps or your brokerâs mutual fund has become overwhelmingly attractive. The only regulation or barrier of entry is the relatively high cost of being a qualified investor. The SEC has largely left Hedge Funds unchecked due to the idea that if an investor is qualified to invest, he is qualified enough to accept the larger risk associated with these types of investments.
Here poses the problem of FIG, not a month removed from its IPO. All of a sudden your sisterâs delinquent boyfriend can now invest in a Hedge Fund. This wouldnât be such a problem if speculators and investors understood the nature of the instrument they were trading. But with market prices where they are today, and with the incredulous and more importantly, unsustainable P/E ratioâs put forth by some companies these days, itâs as if the inevitable has only creeped closer.
But so what, all the P/E ratios are high across the board, everyone is making money hand over fist and even oil is cheap. Therein lies the rub; what happens when the market comes to collect on our transgressions and industry giants such as Goldman will struggle to maintain their P/E of 12:1? What kind of move can we expect from FIG with a P/E of 42:1? Undoubtedly thatâs an absurd valuation and someone will be left holding the bag. Guess what, it wonât be the big boys.
The question then becomes why did they go public in the first place and who makes out in the end. Of course the game is already over by the time theyâve gone public, as FIG was originally valued at 16-18, and amazingly opened up 89% at ~$32, only to steadily decline since. The fund has won, and the game is done by this point, FIG is now another mediocre equity amongst a sea of mediocrity only to be dangerously speculated upon by small fish. Itâs no surprise FIG went public at this time. Itâs the height of their size and the height of the market. They are simply banking profits and collecting capital without redemption obligations when the getting is good, while shooing the retail trader to the back of the queue for his cut. Itâs unlikely that this capital will give much long term stability to an almost unsustainable industry. If anything it could enable a more spectacular downfall not unlike Long Term Capital Management and Amaranth.
From here on out it seems there are only two plays. The choices are more strict regulations or continue down the rabbit hole. If we continue down the rabbit hole we could end up like our Aussie cousins from down under. Hedge Funds bear more resemblance to stocks than typical US funds. They trade them regularly and with as little as it takes to buy a CD at your local bank. Of course, the old adage you get what you pay for applies here as well, where most of the funds struggle to even beat the market. It seems inevitable that if more supply is created to meet the large demand for Hedge Funds then weâll only be sacrificing quality and investing in small corporations of mediocre traders who only serve to increase your risk of ruin as a retail trader. Once it gets to this point, the lack of transparency will surely hurt the funds as there will be one fund who oversteps its ethical bounds, triggering a rash of SEC regulations that could cripple the industry.
Hedge Funds are like an elite club that everyone wants to be a part of. They are the VIP room at Studio 54. Once everyone is allowed in, it takes away from the mystique and appeal. The more people there are the more crowded the room gets and eventually the VIPâs of actual value end up leaving to pursue their endeavors elsewhere, where they can find the privacy they originally sought out. Whatâs left is a bunch of people late to the party who are sweaty and tired from struggling to get to the front of the line, only to find an empty room thatâs already been trashed by the previous occupants.
We need the SEC to intervene and set forth stricter investment requirements for Hedge Funds, or else the disasters of LTCM and Amaranth are sure to pale in comparison to what the state of the industry will look like in the coming years. "
-Thanks all