Shares of Fortress Investment Group, the first publicly traded U.S. hedge fund, doubled Friday in a trading debut sure to catch the attention of many players in the $1.3 trillion hedge-fund industry.
The stock's initial public offering priced late Thursday at $18.50 per share and rose as high as $37 in morning trading on the New York Stock Exchange.
While a number of hedge funds have gone public in Europe, Fortress Investment Group is the first to hit the stock market in the U.S. Investors viewed the IPO as a crucial litmus test to determine whether other hedge funds will follow Fortress onto the stock market.
"The best hedge funds are watching this stock trade, tick by tick," said Scott Sweet, managing partner of Tampa Bay, Florida-based advisory firm IPOBoutique.com.
"It's a pioneer of what will likely be the beginning of several similar, high-quality hedge funds to come public in the U.S. ... Had this not done as well, it would have obviously put a crimp in future hedge funds coming public."
Perrie M. Weiner, international co-chairman of securities litigation at the law firm DLA Piper, estimated 20 more hedge funds could go public in the next two years.
Goldman Sachs and Lehman Brothers, which underwrote the IPO, set the $18.50-a-share price late Thursday, valuing Fortress Investment Group at almost $7.4 billion.
The pricing implies Fortress Investment Group raised nearly $635 million before expenses for an 8.6 percent stake in the company.
"It was massively oversubscribed," said Sweet. "The road show was wall-to-wall, standing-room-only at every site."
Hedge funds, which are loosely regulated investment partnerships catering to rich people and institutional investors, have exploded in the past few years. In the U.S., there are roughly 6,000 hedge funds managing almost $1.3 trillion.
Fortress Investment Group, which manages about $30 billion of clients' investments, is part private equity and part hedge fund. Its private equity funds try to buy controlling stakes in companies in North America and Western Europe, take them private, and later sell them at a profit.
Meanwhile, the company's hedge funds seek to profit off discrepancies in financial markets, and troll for troubled stocks or loans the funds can buy cheaply.
Fortress Investment Group earns money a few ways.
Roughly a third of the company's revenue comes from investment fees. Weiner said hedge funds typically charge 2 percent to 3 percent of assets under management. They also skim 20 percent to 30 percent off the profit generated from the investments, he said.
In the first three quarters of 2006, Fortress Investment Group charged $255 million in management and performance fees, according to a filing with the Securities and Exchange Commission.
The remaining two-thirds of the company's revenue comes from dividends and interest on stocks, bonds and other investments in the funds' portfolios. In the first nine months of last year, Fortress Investment Group booked $810.4 million in revenue from interest payments and dividends.
Fortress Investment Group also books gains when stocks and other investments in the funds' portfolios rise.
In 2005, Fortress Investment Group earned a profit of $192.7 million, up 68 percent from 2004.