There has been plenty of buzz surrounding the world of alternative investments lately. The first big story revolves around two hedge funds affiliated with Bear Stearns that are invested in Collateralized Debt Obligations (CDO's). From what I understand, one of these funds started with $600 million in capital and went out and borrowed $6 billion (with a B) to begin their investment program. This is often a recipe for disaster and in fact, the fund has lost assets and now the lenders are likely to recall the loans and foreclose on the collateral (which won't be worth much if everyone on the street knows they are trying to sell foreclosed property).
The second high profile story dealing with alternative investments is about Blackstone. Blackstone is expected to price their much anticipated IPO tonight and become one of the few publicly traded hedge fund managers (ok, I know the company is a bit more complicated but that's part of what they do in a nutshell). Many have criticized the deal because the CEO Stephen Schwartzman will reap windfall profits from the deal (roughly 7 billion - again with a "B") and because the company will be taxed favorably. Congress is weighing in on the deal with Rep. Henry Waxman asking the SEC to refrain from allowing the IPO until congress has had a chance to look at it (since when does congress say who can and can't list stock?).
Keeping a relatively low profile in the midst of the turmoil is Fortress Investment Group (NYSE:FIG). The company was the first asset management firm dealing with hedge funds and private equity to come public and the shares have done relatively well. The IPO was priced at $19 and immediately the stock traded up well over 60%. With such a big move in the first day, it is natural the stock would have to take some time to consolidate those gains, but even currently, it is trading above 25 or 35% above the IPO price.
Diving into the fundamentals to this company is more challenging than most companies I have worked with. Earnings per share is not a very good measurement of economic value because of the non-traditional business and the way unrealized gains are not included in that GAAP number. However, the company appears to be doing an excellent job of increasing their assets under management and investing these new assets in various diversified programs that have the potential for very attractive gains.
Investment programs offered by Fortress are divided up into 3 groups. Private equity represents $17.8 B of the assets and the capital is invested in companies and ventures that are not traded on public markets. Hedge funds represent $13.5 B and are invested in various strategic programs dealing with currency fluctuations, yield spreads, macro directional strategies etc. The third category is termed "Castles" by the company and relates to their closed end REIT that invests in real estate and properties. This is much smaller with $4.7 B in assets.
At the present time, the company does not have a significant amount of leverage which is important given the volatility of the current market, and alternative investment vehicles in particular. There appear to be a healthy level of investments in the private equity area that are available to bring public and capture significant incentive fees as well as profits that the company will make from its own capital invested in these deals. Finally, the company is having no trouble raising additional assets to put to work as their track record and talented management is gaining good exposure and investors are willing to take additional perceived risk in these non-traditional investments.
I recently purchased a position in FIG taking advantage of the weakness in the stock. I think when the Bear Stearns funds either get their act together, or go ahead and close down, it will take the negative spotlight off this area and result in an increased valuation for FIG. Also, the Blackstone IPO should bring good publicity to the sector and likely be a catalyst for FIG to trade higher.
Disclosure: Author has a long position in FIG
FIG 4-mo chart