Fortress Divests Control of Convex Asia Amid Fund Shakeout

  • Convex team expected to join asset manager City Financial
  • Fortress to focus hedge fund business on Centaurus Global Fund

Fortress Investment Group LLC is exiting its Convex Asia strategy, the latest to divest control of a business amid the hedge-fund industry’s biggest shakeout since the 2009 financial crisis.

City Financial Investment Company Ltd., based in London, has agreed to take over the Fortress Convex Asia Fund and its management team in Singapore in the second quarter, according to a Fortress letter to investors obtained by Bloomberg News that didn’t disclose the terms of the deal. The move is part of a reorganization at Fortress, which includes a bigger focus on event-driven strategies, the letter said. Convex Asia, which managed about $184 million as of February, bets on elevated price swings in Asia and related markets. It had losses every calendar year since its 2012 inception, while gaining so far in 2016.

Fortress is overhauling its operations as most hedge-fund strategies have performed poorly and the $2.9 trillion industry is having its worst start to a year since 2009. Investors have seen “one of the most catastrophic periods of hedge fund performance that we can remember,“ Dan Loeb, manager of the New-York based fund Third Point wrote in a quarterly letter to investors. Managers such as Crispin Odey, Bill Ackman and John Paulson posted declines of at least 15 percent in the first three months in some of their funds, while others are bracing for billions of dollars in redemptions.

Revamping Strategies

Fortress, a New York-listed alternative-asset manager with $70.5 billion under management, has been revamping its liquid markets business since last year after macro strategies disappointed in 2015 and some of its biggest hedge funds posted declines. In October, Fortress announced it was liquidating its flagship Fortress macro fund, run by Michael Novogratz. It folded the pool after almost two years of losses and after a spate of redemptions since 2007 had cut its assets by three-fourths to $1.8 billion. Stu Bohart, who oversaw the hedge fund unit, also left last year.

The decision to exit Convex Asia “is part of a larger strategic repositioning of the Fortress Liquid Markets business, including the closing of the Fortress Macro Fund and a more dedicated focus on the event-driven Fortress Centaurus Global Fund,” according to the letter.

The Convex Asia strategy didn’t contribute to the company’s earnings last year, according to a person familiar with the situation who asked not to be identified because the information hasn’t been publicly disclosed. David Dredge, the fund’s Singapore-based chief investment officer, declined to comment.

“As part of the arrangement with Fortress, and subject to regulatory approval from MAS, the arrangement will see City Financial assume the Fortress offices and allow the Convex team to continue their work in Singapore,” City Financial said in an e-mailed statement.

Convex’s Losses

Fortress Convex dropped 3.2 percent in March as volatility subsided, according to a presentation obtained by Bloomberg News. The fund, which has declined every calendar year since its inception in May 2012, has returned 1.4 percent this year, according to the presentation. The fund has beaten its benchmark Eurekahedge Tail Risk Hedge Fund Index, which has declined 1.6 percent this year.

Instead, Fortress is focusing on the event-driven Centaurus fund, which gained 1.35 percent last year, beating the 1.6 percent loss of global peers as measured by an index compiled by Singapore-based Eurekahedge Pte. Centaurus, which managed $222 million as of last year’s third quarter, is led by London-based Chief Investment Officer Randel Freeman.

Fortress, started in 1998, became the first private equity and hedge fund manager to sell shares to the public. Its shares traded in New York have tumbled more than 39 percent in the past year.

Founded in 2006, City Financial currently has $4.3 billion in assets under management. Chief Executive Officer Andrew Williams oversees six strategies investing in equities, bonds and currencies. The asset manager has investment teams based in London, Hong Kong, New York and Geneva.

Before it's here, it's on the Bloomberg Terminal.