Aug. 14 (Bloomberg) -- Fortress Investment Group LLC's second-quarter net loss widened to $55 million because of compensation costs tied to its February initial public offering, the first by a U.S. manager of private-equity and hedge funds.

The loss was 66 cents a share, compared with $42 million, or 12 cents, a year earlier, the New York-based firm said in a statement today. Profit excluding IPO and other costs was 33 cents a share, beating the 27-cent average estimate of seven analysts surveyed by Bloomberg.

Fortress had $272 million in costs from issuing stock to employees and principals as part of the IPO. Hedge-fund fees more than tripled, offsetting a decline in revenue from leveraged buyouts.

``They have some big, diversified products,'' said Robert Lee, an analyst at Keefe, Bruyette & Woods Inc. in New York, said in an interview. ``They're built to weather the current environment.''

Fortress shares fell $1.35, or 6.6 percent, to $19.22 at 4 p.m. in New York Stock Exchange composite trading, after gaining 7.7 percent yesterday when rival Blackstone Group LP reported better-than-expected earnings.

Deals announced in the quarter included the $6.1 billion acquisition of casino owner Penn National Gaming Inc. and the buyout of Florida East Coast Industries Inc., a real estate developer and railroad operator, for $3.5 billion.

Subprime Fallout

Debt investors stopped buying bonds and loans used to fund LBOs after subprime bond prices fell amid rising defaults, Fortress Chief Executive Officer Wesley Edens said on a conference call today.

``It's largely a price issue,'' Edens said of the LBO debt backlog. ``Price should rectify the situation and we've seen some movement in that regard. This is something that should come back in the next month or two.''

Fortress had $23.4 billion in private-equity assets at the end of the quarter, a 64 percent increase from a year earlier. Hedge-fund assets almost doubled to $15.5 billion.

Revenue fell to $268.1 million from $328.3 million a year earlier on a decline in interest income on investments.

Edens said he would remain cautious about the outlook for financial markets until investors resumed buying debt.

``Of all the risks that exist in markets, liquidity is the top of the list and lack of liquidity is the number-one cause of death in financial services,'' Edens said. ``The market remains vulnerable in the short term to surprises.''

To contact the reporter on this story: Jason Kelly in New York at jkelly14@bloomberg.net

Last Updated: August 14, 2007 16:24 EDT