Listed hedge funds: rescue me
The market does a poor job valuing alternative managers
Spare a thought for Mike Novogratz. Mr. Novogratz was a hotshot macro trader at Fortress Investment Group for more than a decade, before an unceremonious departure in late 2015 after heavy losses in his fund. When he left, Fortress repurchased his shares for $4.50 — well off the company’s 2007 IPO price of $18.50. But when SoftBank recently bought out all of Fortress for $8 a share, a 39 per cent premium to its undisturbed price, it was an indication that the market had failed to understand how to value Fortress.
Fortress was the first “alternative” manager to list its shares. Its performance in the subsequent decade hardly lived up to expectations. The primary reason was that its private equity funds have disappointed which, in turn, kept it from raising new funds. It infamously raised “gates” during the financial crisis to keep investors from redeeming their interests. Mr Novogratz’s macro fund collapsed.
Still, Fortress boasts $70bn under management which echoes a common complaint in the sector; considering its assets and earnings power it is wildly misunderstood. In a recent presentation, it argued that cash and investments on its balance sheet, as well as as-yet unrecognised performance fees, were worth more than $4 a share alone. This implies that before the SoftBank buyout, investors ascribed virtually no value either to its core management nor performance fees.
The day after SoftBank announced its rescue of Fortress, Och-Ziff, the other laggard among listed hedge funds, reported its fourth-quarter results. Its shares are off 90 per cent since its IPO. The fund paid a $412m settlement to US authorities over an African bribery scandal. Its flagship fund has seen its asset base shrink by 29 per cent in the last year.
Flagging hedge funds often just wind down. However, Och-Ziff announced a new incentive scheme to keep its star trader, James Levin, by granting him 39m shares that vest over five years. Dan Ochs, the firm’s founder, offered up to 30m of his own shares to limit dilution. The trick for listed funds: hang on long enough for a saviour who can take advantage of a cheap price.