Hedge fund IPOs no sure fire way to high returns

By Svea Herbst-Bayliss

BOSTON, July 3 (Reuters) - Some hedge funds are ready to sell themselves to the public, but owning a piece of these loosely regulated portfolio companies is no guarantee for future strong returns, industry analysts warned on Tuesday.

Hedge fund Och-Ziff Capital Management Group, which invests $27 billion, on Monday became the latest in a small but growing number of hedge fund and private equity firms to announce plans for an initial public offering.

GLG Partners LP and Third Point LLC recently announced their plans after Fortress Investment Group LLC (FIG.N), which manages $36 billion, went public in February.

Hedge fund managers and lawyers say other large funds are mulling IPOs to raise more capital or let a founder cash out.

Regardless of motivation, institutional investors ranging from big mutual funds like Fidelity Investments to smaller ones like Keeley Asset Management -- who have invested in Fortress -- look ready to snap up new offerings to broaden investments, analysts said.

Hedge fund exchange-traded funds and other products will likely be created soon, said Adam Sussman, a senior analyst with the Tabb Group.

But cashing in on the $1.5 trillion industry's legendary double-digit returns through an IPO may be a tall order.

"If you see a series of firms rushing to try and exploit a window of opportunity, then it is reasonable to think that the market has peaked," said Columbia University Law School professor John Coffee. "Typically firms go public when insiders believe that the value has reached its top most point and won't appreciate any more," he said.

Mike Hennessy, who selects hedge funds at Morgan Creek Capital agreed. "(Och-Ziff co-founder) Dan Och and (Blackstone co-founder) Steve Schwarzman know something you don't and there is a reason they are cashing out," he said.

"Obviously you can't be a terrible fund and try to go public but whether an individual fund's strong returns can translate into good performance for the stock investor remains to be seen," Hennessy added.

Indeed some IPOs are already said to be disappointing. Fortress is now trading at $23.17, far below the $35.49 price it hit on its first day of trading. And private equity firm Blackstone Group's (BX.N) lackluster stock performance may also dampen investors' short term views, investors and analysts said.

Looking ahead, one of the biggest problems may revolve hedge fund legal structures and what tax rate the partnerships will face, with Congress currently considering raising that rate. "Tax uncertainty will certainly chill investor interest to a degree," Columbia's Coffee said.

It is also uncertain whether hedge fund managers who often left bigger organizations like Goldman Sachs, where Och once worked, to found their own shops, will thrive in the glare of more public scrutiny. Teams responsible for the funds' strong returns may not stay on.

"Investors need faith that these businesses won't erode and their performance fees will still be there," said Daniel Celeghin, director of hedge fund consultancy Casey, Quirk & Associates.

Perhaps most disappointing of all, the most luminous hedge funds have no intention of ever going public, robbing average investors of any chance to get close to them.

"SAC's Steve Cohen and Renaissance's Jim Simons have a really good thing going and I seriously doubt they'll ever do an IPO," Morgan Creek's Hennessy said, referring to two of the industry's most successful managers who earned over $1 billion each last year. (With additional reporting by Dane Hamilton in New York)