Fortress to Scale Down Macro Hedge Fund Strategy for Revival

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Fortress Investment Group LLC Principal Michael Novogratz
Michael Novogratz, principal at Fortress Investment Group LLC. Photographer: Jacob Kepler/Bloomberg

Fortress Investment Group LLC will shrink its macro hedge fund business to help turn around performance that’s struggled since the start of 2014.

“We’re right-sizing the business, scaling it down to an appropriate size for one risk-taker,” Michael Novogratz, who became the sole manager of the strategy this month after losses, said Thursday on a conference call with analysts and investors.

The liquid markets unit, which houses the macro funds, was the only Fortress business to have a loss in the second quarter, the New York-based firm said Thursday. Its credit arm almost doubled pretax distributable earnings and its private equity unit, which contributed the most to the results, reported lower profit as it sold fewer holdings.

“Hopefully by the end of 2016, liquid markets is a contributor” to the firm’s profits, Novogratz said.

Fortress, the first publicly traded private equity and hedge fund manager in the U.S., said firmwide profit fell 20 percent during the period. Pretax distributable earnings, which exclude some compensation costs and other items, decreased to $137 million, or 30 cents a share, from $172 million, or 39 cents a year earlier. The results beat the 26-cent average estimate by five analysts in a Bloomberg survey.

Shares of Fortress declined 2.6 percent to $6.82, the lowest since October, at the close of trading in New York. That extended losses this year to 9.8 percent, including reinvested dividends.

Redemption Notices

The liquid hedge funds unit had a pretax loss of $6 million in the second quarter with assets dropping to $7.4 billion. At the end of the period there was $718 million of redemption notices outstanding, including $510 million to be paid primarily in the third quarter.

Assets in the macro part of the unit, which makes bets on currencies, commodities, stocks and bonds, fell about $450 million to $2.3 billion during the quarter amid redemptions and losses. The fund declined 6.2 percent during the quarter and is down 9.9 percent this year through last week.

Fortress manages $72 billion in fee-paying credit, private equity and hedge fund assets. It raised almost $2.3 billion of permanent equity capital during the quarter, increasing private equity assets to $16.5 billion, the highest since going public in 2007.

The firm has said it aims to pull in $12 billion to $15 billion of new capital in 2015. The fundraising effort “has solid momentum,” Jefferies Group analysts led by Daniel Fannon said in a said a report to clients this month.

Fortress reported lower investment gains than in last year’s second quarter, when two large private equity sales lifted results. The private equity business reported pretax distributable earnings of $76 million, down from $131 million in the earlier period.

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