Private Going Public, Public Going Private


–“Hedge funds explore the option of a listed existence,” we read in the FT. Hedge funds have found a new source of money, by going public! That is one sure way to find alpha (returns above the market average). Sell share in your management firm to the public! “Everyone is interested,” says a British banker. “These initial public offerings are the next phase in the evolution of hedge funds.”

–“I’d be very surprised if we don’t get another five [IPOs] this year and it could run at these levels for years….It’s not like the tech bubble, where bankers were IPO-ing companies that were loss making. These businesses are earning real money,” says another banker.

–It boggles the mind that public would clamour to buy shares in hedge funds, whose stated goals are modest, to match the market on the upside and hedge against it on the downside. But with the prospect of hundreds of billions of dollars in lumpen money itching to hold them, hedge funds see more money in seeking an IPO than in hedging risk.

–“This is the big game,” another banker says, according to the FT piece. “Alternative assets are just the pimple on the side of the rhino. He’s referring to the fact that global stock markets have roughly $33 trillion in listed assets, while global bond markets are worth around $22 trillion. By comparison, hedge funds and alternative assets have only $1.4 trillion in assets under management.
–Hedge funds would no longer be an “alternative asset” if they were to go public as a stock. True, being a publicly-listed company has its drawbacks, transparency being the chief one, and seemingly the chief enemy of hedge funds that like to carefully guard their strategies. But as a publicly listed company, a respectable asset and not just an ‘alternative’ asset, hedge funds can start speculating even more.

–“The big growth money is in long-only assets,” another banker says. And here we pick our jaw up off the floor. So little is thought of risk these days that an entire class of assets designed to be low-risk has abandoned that mission for something else entirely. Why hedge against risk when there is an ocean of money to be made in “long only” assets like stocks and bonds

–When the professional risk managers and short sellers decide, en masse, to capitulate and go long only, how far away can a severe correction be? Maybe Dr. Faber is on to something.

–What a strange world the financial world is. On the one hand, private equity is taking quality publicly-listed companies off the markets. Investors lose access to real companies with real assets and real cash. On the other hand, quality assets are replaced by the public listing of asset management firms, firms that produce nothing but asset management strategies. What will the hedge funds buy if private equity takes everything private? Each other?
–And how do you value a hedge fund anyway? The firm’s assets are the traders, not the trades. And the problem with traders is that in addition to their brains—which can be fevered, faulty, and inexperienced—they also have legs, which can walk their brains out the door at the first sign of trouble or a better offer.

–How do you value a company whose assets can get up and walk out the door for a pastrami on rye at noon and never come back? Luckily, funds may not have to work too hard to answer this question to prospective investors. There seem to be plenty of retail investors, pension funds, and institutions eager to hand over their money to the money-shufflers, or to buy the stocks of money-shuffling firms.

It begs the question:  has their ever been a more clever yet more transparent fraud perpetrated on the public in financial history?

–A giant wealth transfer is taking place. The super-elite end up owning private companies loaded with assets. The public, with paper.  And as the great Mogambo points out below, this kind of asset inflation leaves one party with the important part of wealth, the real asset, and the other party, the public, with the unimportant part, a scrap of worthless paper.

–Oh, and we mentioned some suggestions on what makes liquidity disappear, leading to “severe corrections.” We have a couple of answers, but since we’ve run off at the mouth already, we’ll post them over at the website and be sure to include a link tomorrow!

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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