Public Hedge Fund Stocks Not Earning Hedge Fund-Like Returns

So much for making caviar dreams come true for investors on hamburger budgets.

Publicly traded U.S. hedge-fund stocks, which began trading only in the last few years, were billed as a way for regular investors to get a taste of the outsized returns available only to large institutions and high-net-worth individuals.

Lately though, the stocks have done nothing of the sort, losing more value than an investment in the underlying funds themselves.

In fact, since the financial crisis started, the stocks of public hedge-fund managers Och-Ziff Capital Management Group LLC (OZM), Fortress Investment Group LLC (FIG), and Blackstone Group LP (BX) have fared worse than most traditional asset managers.

Take New York-based Och-Ziff: An investment in Och-Ziff's main hedge fund would have lost an investor less than 16% in 2008, better than the average hedge fund, which lost less than 20%, according to Hedge Fund Research. The company's smaller funds lost as much as 30% but nowhere near the more than 80% an investment in the stock lost.

Of course, expecting a direct correlation between the stocks and the underlying funds would be foolish. The second half of 2008 featured an historic stock-market collapse, and public hedge-fund and private-equity managers weren't the only companies whose stocks got caught in the spiral. Plus, the portions of these companies spun out to the public were relatively small, with the vast majority of shares still closely held. It should also be noted that Fortress and Blackstone have more private-equity-centric businesses than hedge-fund heavy Och-Ziff.

Still, in 2008, Fortress shares fell more than 90%, Blackstone's more than 70%, and the shares of Carl Icahn's public vehicle of hedge funds and holding companies, Icahn Enterprises LP, (IEP) fell almost 80%.

Compare those numbers with the stock performance of some of the bigger traditional asset managers like BlackRock Inc. (BLK) and T. Rowe Price Group Inc. (TROW), each of which fell around 40%. A lesser percentage of mutual fund investors bailed out of funds than hedge fund investors. Also, hedge fund earnings were harder hit when their performance fees evaporated - mutual funds don't charge those fees. Moreover, it's clear that the sheer headline risk and lack of transparency of hedge funds certainly played a role in their stock price declines.

Fortress was forced to temporarily halt redemptions in some of its hedge funds. Och-Ziff suffered high redemptions simply because it ran some of the funds that investors could actually exit. And Blackstone and Fortress were both forced to mark down their private-equity portfolios.

So far in 2009, the stock of Blackstone is up 21%, Och-Ziff is up 41%, and Fortress has nearly tripled. They're beating the returns of T. Rowe and BlackRock, which are down 12% and up 1.4% respectively.

One question that will be answered by the stock market's recovery - whenever it happens - is whether these stocks will ever trade anywhere near their companies' underlying funds' performance. Another question is whether initial public offerings of hedge-fund firms - all the rage in 2007 and 2008 - will ever again be popular.

-By Joseph Checkler; Dow Jones Newswires; 201-938-4297; [e-mail]