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Investors joining hedge fund club get burned


Date: Thursday, January 8, 2009
Author: Joseph A. Giannone, Reuters.com

Two years ago, investors scrambled to snap up shares in elite hedge fund firms, eager for a piece of the lucrative action.

What they got instead were big losses.
Starting in early 2007, when hedge fund and private equity firms were minting cash, four private investment firms cracked open the door to let in small investors. Fortress Investment Group LLC, Och-Ziff Capital Management Group, Blackstone Group LP and GLG Partners Inc led a new class of firms that let ordinary investors ride the wave of hedge fund riches.
In retrospect, it turned out to be a classic case of 'buy high, sell low' as the worst financial markets in decades rocked Wall Street and the funds business.
"Over the two years they've been public, their performance has just been abysmal. Investors who went in at the beginning have been rocked by what's gone on in the broader market," said Jackson Turner, a funds company analyst at Argus Research.
"It really calls into question the wisdom of these companies going public in the first place."
The average hedge fund lost 23 percent last year, according to data from Hedge Fund Research -- with some firms losing more than 60 percent -- as crumbling markets and a wave of client redemptions took their toll.
And those who arrived late to the party suffered the biggest hangovers. Fortress shares lost 92 percent last year, while Och-Ziff shares plunged 80 percent.
Emblematic of the woes across the hedge fund industry, Fortress funds plunged in value and clients demanded their money. The New York firm suffered 45 percent client redemptions before they blocked the exits last month."
Stock in Fortress, which was the first U.S. hedge and private equity fund to go public in February 2007, sank so low it briefly risked falling short of New York Stock Exchange listing standards late last month.
In trading on Wednesday, they fetched $2.24 a share as some speculators bet Fortress management might take a firm, now worth about $800 billion, private again. That's a far cry from its euphoric debut, when shares priced at $18.50 and surpassed $35 on its first day of trading.
Fortress did not return calls seeking comment.
Likewise, the other three -- Och-Ziff, founded by star Goldman Sachs trader Daniel Och; London-based GLG, which went public in a reverse merger in 2007; and Blackstone Group, the private equity giant that went public just before markets shut down -- all saw their market values plummet.
The shares of Och-Ziff, which this week disclosed its managed assets fell 20 percent in December, fell 8 percent to $4.76 on Wednesday. Since going public in November 2007, they have tumbled 85 percent. A spokesman declined to comment.
Analysts covering Och-Ziff this week cut their profit forecasts, although many also forecast redemptions would ease and that Och's strong relative performance and reputation would bring investors back.
Since GLG merged with a shell company in June 2007, its shares are down 74 percent. Assets and earnings sank last year and the firm was forced to scrap its dividend to preserve capital.
"It's been a difficult period for everyone," said Daniel Fannon, a fund company analyst at Jefferies & Co who rates Och-Ziff shares a "buy" but has a "hold" rating on Fortress. "No one is immune from the redemptions trend. I don't know when it ends."
Argus' Turner, though, was less sympathetic.
"These people are supposed to be able to anticipate where the markets will move," he said. "In this case, if you look at performance of these stocks their timing was poor." (Editing by Andre Grenon)