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Roula Khalaf, editor of the FT, selects her favorite stories in this weekly newsletter.
The writer is a former financial research analyst at Credit Suisse and head of corporate strategy at Nex Group
Billionaire Bill Ackman’s plan to take his company Pershing Square public next year is a rare move of its kind in the world of hedge funds.
Large hedge funds usually prefer to do their work privately, far from the hustle and bustle of the public markets. If they are on the list, the limited record is not very pretty. The most notable car crash is Sculptor, the hedge fund group formerly known as Och-Ziff Capital Management. When it went public in 2007 before the financial crisis, it was valued at $12 billion, but last year it was bought by Rithm Capital for $720 million.
Given how active hedge funds are in the public markets, their lack of listings may seem strange – especially in light of the strong track record of broader private equity firms like Blackstone, Apollo and KKR.
The large listed investment firms in the private market have seen their values rise and overtake those of many traditional asset managers. The total market capitalization of the ten largest listed players is approximately $550 billion. Why then have so few hedge fund groups followed the same path to a stock exchange listing? Well, it’s partly a matter of different incentives at play.
When I covered the new sector of publicly traded private equity and hedge fund companies before the financial crisis, a perennial question was: Can ‘alpha’ scale? That is, whether an investment manager’s ability to deliver returns above market levels is eroded as he manages more and more assets. It turns out that scaling has been difficult for some pure-play hedge funds. Many have chosen to limit inflows and focus on performance. In other cases, growth has led to a deterioration in returns, followed by outflows.
Given that investors value stable management fees more than volatile performance fees, this makes pure-play hedge funds less suited to public markets than the private capital firms that have become asset-harvesting monsters. Today, the three most renowned private equity firms – Blackstone, KKR and Apollo – have assets under management of more than $2.3 trillion, a nearly twelvefold increase since the financial crisis.
According to Bain & Co, private market assets have increased from $4 trillion to $14.5 trillion over the past decade. That compares with an increase from $2.4 trillion to $4.3 trillion for hedge fund industry assets, as estimated by data provider HFR.
The leading private market investors are adept at expanding into areas such as private credit. real estate and infrastructure. Only 30 percent of Blackstone’s assets under management currently come from private equity. Apollo was an early investor in insurance with its Athene venture, which has fueled recent growth.
There have been examples of large hedge funds successfully expanding beyond their traditional area of expertise. One example is Citadel’s growth in commodities. But hedge funds generally have some disadvantages as asset collectors as they scale. For private equity firms, the longer-term nature of their investments means that the impact of performance is felt only with a significant lag on fundraising. And existing assets under management are sticky given the long duration of lock-ins for investors.
The key man risk is also not the same. There is much more day-to-day involvement of founders and upper management in hedge fund investment decisions. Citadel’s Ken Griffin and Point72’s Steve Cohen have a reputation for calling their portfolio managers at all hours of the day to request positions. And the long-term nature of private market funds tends to tie star managers to existing companies.
All of that fuels Ackman’s move to cast Pershing Square as a major test for the hedge fund world and whether publicly traded companies can scale. Pershing already manages an investment fund with approximately $15 billion in assets under management that trades on the London Stock Exchange and Euronext Amsterdam. As the Financial Times has reported, the fund generated about $155 million in hedge fund management fees and a $312 million performance fee in 2023. Ackman sold a 10 percent stake in Pershing this week in a deal that values the hedge fund at just over $10 billion.
By the time of the planned IPO, Pershing may have launched a new permanent endowment fund in the US, which would generate more fee income. This will make it more like a publicly traded private equity firm than a hedge fund in terms of tied up capital. And Ackman’s high profile will attract the attention of potential investors. But the company will have to demonstrate that its acumen extends beyond itself, and it will still have less diversification than hedge funds like Citadel. Much will still depend on the persistence of investment performance.
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