In between all this, who cares (really!) about issues like lack of residual value or conflict of interest! Everyone is happy right now.

The the on the underlying investments cannot be completly attibuted to the skill of the managers. Because many of the fees, and corresponding cash flow, are based on the return of the underlying investments there is at lease some basis for calculating residual value.

Could be part of FIG’s marketing strategy to expand its Assets Under Management (AUM) size by flaunting its Public status. A public company offers better transparency ( in comparison with a lowly regulated hedge fund) and large pension / University funds would flock to it for this very reason.

By going public, I think FIG lends an element of credibility and permanence to its business model so that it holds out to other hedge funds ( facing exodus of its star fund managers ) to turn in their investments for FIG to manage. Thus remaining unaffected by star attritions.

There are downsides, of course.

The quality of investment decisions would vary from that of (the exiting) fund manager and may be FIG assumes that investors are Manager agnostic ( not always) and would stick with the FIG.

It could also go against the wishes of the investors in the fund. Normally accredited investors ( including individuals with a min networth, Funds with some min. no. of qualified investors etc., alone are eligible to invest in hedge funds ) prefer a hedge fund, owing to its low regulatory oversight enabled by its in-built and permitted opacity. This brings down compliance costs ( SOX Compliance cost for a mid-sized company is about $ 2 mm ) of the fund manager. By going public, it is deprived of this immunity and relative obscurity that comes with it.

By submitting itself and its investment processes ( and the hedge fund itself ) to higher level of probity by SEC and other regulatory peek-ins, its investment strategies are no longer confidential. Everything is laid bare for others to emulate and the arbitrage opportunity vanishes quickly. FIG will have to spin innovative strategies all the time since the viginity of the strategy lasts only till its next periodic filings with the regulators.

Demand for anonymity prefered by qualified investors in a hedge fund will no longer be available if the Fund Manager is a Public Company. It would also neutralize the relative obscurity / low compliance cost advantage conferred by the hedge funds to its qualified investors who are locking themselves into this asset class for this very reason.

But I am sure FIG must have its own reasons outweighing the downsides which occur to me and chances are that I may have missed a whole lot of things here.

“There are two reasons why I take a dim view of a hedge fund going public. The first one is the lack of Residual Value. The second is the conflict of interest that arises in compensating senior managers.”

@Surya, FIG is NOT the fund itself, it is the fund management company. Nor is it like a fund-of-funds. Investing in FIG is like investing in the mutual fund management company (like say Legg Mason, which is public) rather than in their Value Trust or myriad other mutual funds.

And actually from a risk standpoint, a downmarket can impact FIG pretty seriously. According to their S-1, their sources of income are 1)management fee on all assets managed, 2)carry, or incentive income on gains with clients’ capital and 3)gains in FIG’s own investments in the funds.

#2 and 3 are both likely to be hurt in a down-market. The hedge fund and private equity businesses are different but are definitely correlated. A good post on this can be found here http://www.informationarbitrage.com/2007/02/my_review_of_fo.html

NYSE is reasonably efficient, so either the FIG will come down or the book building process was inefficient or there is some helpful statistical secret! This article did help me relate market efficiency theory to practise .

I am sure you type on the fly as thoughts come to your mind, but for the sake of your blog readers, please scope out your viewpoint clearly. Okay?