IPO Flipping is the New Source of Hedge Fund Alpha

“I’ve been doing fifty million a year in commission business with your desk, and believe me, it’s not because I care what your chief strategist’s research reports say. You’re not allowed to give me ‘color’ on the trading activity of others anymore because your line’s recorded. You’re also not able to create products that will fail for me to be able to short. And I sure as hell don’t need your firm’s Barclays Center tickets, I’m a Knicks fan and I have a box at the Garden. The least you can do is get me a million shares of the LinkedIn IPO.”

One of the key sources of alpha for famous hedge fund managers operating in the late 1990’s was the IPO flip. They won’t admit it now when citing their “compound returns” from that era, but everyone in the game knows it. And then the strategy kind of went to sleep as IPOs cooled off and the markets stopped guaranteeing mammoth first-day pops.

But over the past year or so it’s been Game On again. As explained in the below linked-to article at ValueWalk, this is a perfect environment for it. The public is once again hungry for deal stocks and will bid up shit like Potbelly and the Container Store by 100% upon the open, it’s almost a lock. In the meantime, companies – specifically tech startups – have been holding off on their IPOs to the extent possible, giving capital rich hedge funds an even better opportunity than IPO share – they’re actually buying in at earlier stages while the company is still private. This makes the profit on the flip even juicier.

Profits are profits and no one is saying these gains require an asterisk next to them. But be aware that this source of alpha is likely finite and fleeting.


Hedge Funds Beat The Market By Avoiding It (ValueWalk)