Fortress Profit Falls 60% on Decline in Hedge Fund Fees

Fortress Investment Group LLC (FIG), the asset manager whose chief executive officer resigned last month, said fourth-quarter profit fell 60 percent as hedge fund fees declined.

Pretax distributable earnings, which exclude some compensation costs and other items, were $50 million, or 9 cents a share, compared with $125 million, or 24 cents, a year earlier, the New York-based company said today in a statement. That fell short of the 10-cents-a-share average estimate of five analysts surveyed by Bloomberg.

Fees declined in the fourth quarter as assets fell from a year earlier and hedge funds declined globally. Fortress is under the leadership of co-founder Randal Nardone after former CEO Daniel Mudd resigned last month amid a government lawsuit stemming from his tenure as the chief of mortgage financing company Fannie Mae.

“The market is not without significant potential risk,” Stuart Bohart, the firm’s president of liquid markets, said on a call today with analysts and investors. “So we feel relatively good about our ability to pound out returns but we know we’ll need to be fleet-footed.”

Fortress fell 2.8 percent to close at $3.89 in New York trading. The stock has gained 15 percent this year, compared with a 9.1 percent increase in the Standard & Poor’s 500 Index.

Assets under management declined 2 percent to $43.7 billion from $44.6 billion at the end of the 2010. Assets in private equity funds dropped to $9.3 billion from $11.9 billion a year earlier.

Raising Money

Fortress raised $4.2 billion in 2011, with about half going to its credit private equity funds and a third to liquid hedge funds, and returned $3.9 billion to limited partners in its private equity business, Daniel Bass, the firm’s chief financial officer, said on the call. The company declared a fourth-quarter dividend of 5 cents a share.

Distributable earnings from Fortress’s credit hedge funds fell to $9 million from $32 million a year earlier. Investors pulled $1.7 billion from its liquid hedge funds in 2011, and the firm said it’s returning $1 billion more this quarter.

Fortress’s distributable earnings don’t comply with U.S. generally accepted accounting principles. Under those rules, the company’s net loss attributable to Class A shareholders widened to $91 million in the fourth quarter, or 49 cents a share, from $13 million, or 9 cents, a year earlier.

Distributable Earnings

Global hedge funds declined 0.3 percent on average in the fourth quarter, according to the Bloomberg Active Indexes for Funds. The MSCI All Country World Index of stocks gained 7.1 percent in the quarter, while the Standard & Poor’s 500 Index, which tracks the largest U.S. companies, rose 11 percent.

Distributable earnings from the firm’s fund management unit fell 29 percent to $253 million for the year, driven by lower incentive income from funds and a decline in investment income, according to the statement. The firm’s private equity funds generated earnings of $93 million in 2011, down 27 percent from a year earlier, while the funds’ carrying value increased 9.3 percent on Fortress’s financial services and senior living investments.

Blackstone Group LP (BX), the world’s largest private equity firm and a bellwether for the buyout industry, earlier this month posted a 12 percent decline in profit after a drop in performance fees and investment income. KKR & Co. (KKR) said fourth- quarter profit fell 68 percent as investment income sunk. Both firms are based in New York.

‘No Impact’

Private equity firms pool investor money to take over companies by buying out shareholders, using mostly debt, with the intention of later selling the companies or taking them public for a profit. Hedge funds are lightly regulated pools of capital whose managers may buy or sell any asset. Managers of both types of funds charge annual management fees, traditionally 1.5 percent to 2 percent, and receive a portion of investment gains equal to 20 percent.

Nardone, a Fortress principal, is serving as interim chief executive officer after Mudd resigned last month. Mudd took a leave of absence on Dec. 21 to respond to allegations by the U.S. Securities and Exchange Commission that he understated by hundreds of billions of dollars the subprime loans held by Fannie Mae, where he was CEO from 2004 to 2008.

Fortress said in a Dec. 16 statement that the complaint against Mudd “does not relate to Fortress,” and Nardone said on today’s call that he doesn’t anticipate any “major” changes in the firm’s course or strategy under his leadership.

“The transition has had and will have no impact on the investment teams or processes,” Nardone said. “Most of my new direct reports were my old direct reports.”

To contact the reporter on this story: Devin Banerjee in New York at dbanerjee2@bloomberg.net

To contact the editor responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net

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