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Why I Don't Think the Fortress IPO Signals a Top in Hedge Funds

February 9, 2007 Chad Brand, Peridot Capital Management LLC
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Many people will likely point to today's IPO of Fortress Investment Group (FIG) as evidence that we are nearing a top in the hedge fund and private equity bull market. While I have no opinion on the investment merits of the stock (it is up 73% on its first trading day, and I have not looked at their financials), I do not think that this IPO alone is worrisome for the markets.

While the growth in new hedge funds and private equity funds will likely slow in coming years, both are here to stay given that they are truly viable investment vehicles. Just because these types of funds are newer than investment banks, mutual fund companies, and other buy-side asset managers, it doesn't mean they should not be publicly traded. They are able to do things such as sell short, profit from arbitrage opportunities, and take a long term view with a turnaround situation without the constant badgering from short-term oriented analysts. There is a real market for these strategies, and it is not just a fad.

However, just because they are here to stay, it doesn't mean that hedge fund and private equity growth won't slow. Whenever you have a huge spike in interest for something, you will ultimately have people getting involved who are in over their heads. With more hedge funds being created, there will be more failures in the future. It doesn't mean hedge funds are bad, or just a fad, it simply means that like many other businesses, the strong survive and the weak get weeded out.

While I do think public hedge/private equity funds are here to stay, that is not to say that investors should go out and buy up as many shares as they can. Much like investment banks like Goldman Sachs (GS) and asset managers like Blackrock (BLK), these companies will fall on hard times when markets turn south. Investors will need to compare and contrast a company like Fortress to a Goldman, or a Blackrock, to determine how their financial results will fare in various market environments. Using that information will help them decide how much they are willing to pay for each of their respective stocks relative to each other.

Full Disclosure: No positions in BLK, FIG, or GS at time of writing

In financial services, market - general
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Peridot Capital Management LLC is a registered investment advisor in the states of Maryland, Pennsylvania, and Washington. The firm may not transact business in states where it is not registered or exempted from registration. In most states, the firm is exempt from registration if it has fewer than six clients who are residents of that state. As a result, Peridot Capital Management LLC is free to provide services to residents of every state and applies for registration as required. Individualized responses to persons that involve either the effecting of transactions in securities, or the rendering of personalized investment advice for compensation, will not be made without registration or exemption.

The content published on our blog represents the opinions of Mr. Brand and he and/or his clients may hold positions in securities discussed. Such positions will be disclosed at the time of publication, although subsequent changes to those positions will be made without notification. The information contained in blog posts is believed to be accurate when published, however, mistakes could be made. As a result, do not rely on the content exclusively for your investment due diligence. The commentaries published do not constitute investment advice, as readers’ personal investment goals and risk tolerances will dictate which investments are appropriate for them. Our blog is meant to be one of many sources for readers to conduct their own research into specific investments. Consult an investment professional before acting solely on information found on this site. If you do not have an investment professional to work with, you may contact Peridot Capital Management LLC directly.