On the Valuation of Hedge Funds (or Hedge Fund Managers)

So Felix Salmon has taken a justifiable swipe at some oddish Bloomberg articles on Citibank's spinoff of its internal hedge fund, as required by the Volcker Rule.

But in doing so, it seems as though he may have hit his own wicket.  (OK, I'll admit to wishing I was here, rather than grading Con Law exams).

For example, he argues that "all future income is reliant on both the investors and the managers sticking around, which means that the value of a hedge fund to its managers is always going to be higher than the value of a hedge fund to an outside investor with little ability to keep the managers in place."

First off, I assume he is referring to the manager, rather than the fund itself. And if value is reliant on the managers sticking around – why is a hedge fund that much different than any other company? Even a company with a large amount of fixed assets depends on the quality of its management to give those assets real value (e.g., GM) and companies with slight physical assets don't disappear when a key manager departs (e.g., Apple).

He also says "almost nobody buys and sells stakes in hedge funds as an investment" and thus suggests that hedge fund "valuation should start at zero, rather than with some academic discounted-cash-flow analysis."

Well there is the case of Och-ZIff, a publicly traded hedge fund manager. Its outside shareholders do seem to think that there is some value in the future cashflows there, despite the fact that the managers might up and leave at a moment's notice. Either that or investors are buying the stock regardless of price. That seems likely.